"If the investments you are making are at the higher risk end of the spectrum from an overall risk perspective you balance those with a higher level of cash," he told a media briefing on Wednesday.

The key asset allocation percentages for the fund at December 31 were as follows: Australian equities 6.5 per cent, global equities 24.5 per cent, private equity 10.4 per cent, property 6.5 per cent, infrastructure and timberland 7.1 per cent, debt securities 11.8 per cent, alternative assets 12.6 per cent and cash 20.6 per cent.

The fund generated a return of 8.4 per cent in the 2015 calendar year, 3.1 per cent in the six months to December and 1.4 per cent in the December quarter.

Neal said the fund had been increasingly cautious about global equity markets because it believed shares were "fairly fully valued". He said the returns available from taking risks were not high enough to justify those risks.

One aspect of the fund's performance which is not often talked about is its use of foreign currency exposure as a defensive mechanism.

The fund had exposure to currencies in developed countries of 30 per cent at June 30 last year. This was mainly exposure to US dollars and Japanese yen.

Lessons for investors

Investors looking to the Future Fund for guidance about their portfolios should take note of the fund's ability to shift its assets relatively quickly in response to macro-economic developments and changes in market sentiment.


This is what fund managers do provided their investment mandate gives them the flexibility to move freely between asset classes.

For example, Geoff Wilson, who is chairman and portfolio manager of Wilson Asset Management, has also been dialling down the levels of risk in the $1.2 billion WAM Capital, a listed investment company that invests in listed equities and fixed interest and cash.

WAM Capital's holdings of cash and fixed interest have risen from 32 per cent of its portfolio at December 31 to 45 per cent this week.

Wilson says these higher holdings of liquidity reflect a view that there are now fewer opportunities to buy undervalued shares. Higher levels of cash and fixed interest mean the fund can move quickly when opportunities present themselves.

Not all fund managers have mandates which allow them to move between asset classes as quickly as Wilson has been able to do. Many fund managers have mandates which force them to be invested fully in equities or some other asset class.

Wilson believes the Australian equity market is now in a bear market. He says that since the late 1930s bear markets have usually lasted for about 18 months.

He says the market peaked in April last year which means the bear market will last at least until the end of this year.