Investments returns are likely to fall as central banks and governments ease back on economic stimulus, the head of Australia's sovereign wealth fund says.
Future Fund managing director David Neal says quantitative easing and other measures aimed at stimulating economic growth since the global financial crisis have boosted investment returns over recent years.
But this has been done essentially by bringing forward returns from the future.
"The look-forward returns across the board are now much lower than they were, and much lower than normal," Mr Neal told an Australian British Chamber of Commerce luncheon in Melbourne on Wednesday.
The Future Fund holds $117 billion in investments.
It was set up to help Australia prepare for the ageing of the population and specifically to pay the superannuation of retired public servants.
Mr Neal said the Future Fund's investment portfolio had generated a cumulative return of 52 per cent in less than three years since July 2012.
But such a level of return could not be sustained indefinitely.
Given lower returns, achieving long-term return objectives was going to be very hard.
Some wealth funds could respond by taking higher risks to stretch for higher returns, which is what central banks wanted the funds to do, Mr Neal said.
The alternative was to take less risk and build a more defensive portfolio.
The dilemma for investors was figuring out when the economic stimulus measures were going to end.
"For our part, we have begun taking modest amounts of risk out of the portfolio, although at this stage we are still within what we would consider to be normal levels of risk," Mr Neal said.
"We are more inclined to reduce risk than to chase return, but we have to recognise the determination of global policymakers."
