Cash is king so the saying goes and right now Australia's sovereign wealth fund – the Future Fund -which was originally seeded with the government's remaining shareholding in Telstra Corporation Ltd (ASX: TLS) has cash to the tune of $23 billion, equating to a 20% portfolio allocation.
According to the Future Fund's just released June Quarter Update, over the past 12 months the fund's allocation to cash has grown from 11.2% to 19.5% making it the single largest asset class of the fund. The combined global equities allocation of developed and emerging market equities taken together however was larger at 27%; a further 6.8% of the fund was allocated to Australian equities.
In the 2015 financial year, the fund achieved a return of 15.4% with funds under management now standing at $117.2 billion.
Shedding some light on the motives for the fund's shift to higher cash levels was the following comment:
"Prolonged period of good returns driven by exceptional policy actions that cannot be sustained indefinitely."
The Future Fund would appear to be signalling that it expects the returns from certain risk assets such as equities to be lower in the near future than they have been in the recent past. The fund's decision makers may also expect improving returns from cash when interest rates eventually rise.
Most importantly however, the raising of cash levels probably signals expectations of more appealing investment opportunities in the future.
If you share a similar view on the overall state of investment markets to the Future Fund, what is the best course of action?
Many investors prefer to remain fully invested and not risk missing out on equity market upside. One sensible way to hedge your bets can be to own shares in companies with strong balance sheets, large cash reserves and strong free cash flows that will allow a company to take advantage of investment opportunities if and when they arise. Two companies worth considering are Premier Investments Limited (ASX: PMV) and Flight Centre Travel Group Ltd (ASX: FLT) which have minimal debt levels and cash holdings of roughly $290 million and $565 million respectively.
