Matt Whineray was promoted to chief investment officer of New Zealand’s NZ$26.7 billion ($21.3 billion) sovereign wealth fund in June this year.

A former barrister and investment banker, Whineray joined NZ Super in 2008 as general manager of private markets and held a number of senior roles before being elevated to head the investment team.

After several years of strong performance he expects the fund – and global markets – to be heading into a phase of more muted returns.

Q What are your views on likely moves in markets over the next two years?
A
We don’t try to forecast short-term movements, but we do attempt to spot medium-term trends and take advantage of situations where prices are far from fair value and likely to revert over time. At the moment markets are much closer to fair value than they have been in a while, so we have reduced our active positions. We are still a little overweight growth assets such as global equities and are underweight bonds. We expect bonds to revert to fair value over the medium term.

Q Do you expect NZ Super Fund’s outperformance to continue over the next five years?
A
Our long-term performance expectation is to beat the New Zealand Treasury bill return by at least 2.5%. In the past two years we have beaten T-bills by 23% and 16%. We don’t think this pattern will continue. We have benefited as markets recovered after the financial crisis, but we expect performance to be more muted in coming years. Over the long term we expect our reference portfolio to return around 7-8% a year. However, given the level of risk we run, we expect reasonable volatility around this and could easily see returns below that as the process of mean reversion works its way through.

Q How has the level of domestic versus international assets you hold changed?
A
In dollar terms our New Zealand assets have grown but in percentage terms they have fallen because our international assets have performed strongly. We currently hold around 16% of our assets in New Zealand versus about 20% last year.

Q In 2012 you said core infrastructure and farmland prices were high. Is that still the case?
A
If anything infrastructure prices have got even higher. Several port assets in Australia have been sold at top-end values. Farmland prices are also elevated but we might start to see a change in this due to a drop in global dairy prices in the past 12 months. The dairy payout will be a lot lower in the coming year compared with last year, so we would expect some softness in the rural market. We would consider buying farms if prices soften.

Q What opportunities do you see elsewhere?
A
To be honest there aren’t a great deal of opportunities at present, just potential threats, which is why we have been reducing our active risk. There might be some opportunities around shorter-term funding trades driven by capital requirements for banks. But, looking ahead, it is not a market that will reward us for taking risks. We think conditions will remain positive for private equity exits and we have made good returns in this area – although this is money coming back, not going out.

Q How are you managing your mandates to reflect this outlook?
A
Our approach is to have larger mandates with fewer external managers where we can ask for flexibility around how the capital is allocated and alter the amount invested. We recently awarded a mandate to Kohlberg Kravis Roberts focused on the unconventional energy sector in the US. Some of the money is going into a collective investment vehicle, but the majority is in a separate account and we have regular discussions with them about what areas we want to invest in.

Q Must you be big to demand such flexibility?
A
The level at which you can start to have this control is not as large as you might think. For a $200 million mandate you should be able to have genuine discussions with managers about flexibility. We are not a big fund, but we are active. It’s not about size, it’s about being clear about what you want to achieve.

Q  What tolerance do you have for underperformance in an asset class or manager?
A
It depends on the reason for underperformance. As a long-term, contrarian investor with certain cash flows we have the ability to ride out and even benefit from market volatility and short-term underperformance. Longer-term, if the investment opportunity isn’t playing out as expected, we would reconsider. If there are manager-specific conviction issues around, say, trust or team turnover, we would also reconsider.

Q Does NZ Super see liquidity issues in secondary market bond trading as a problem?
A
Most of our fixed-income exposure is passive and we have a big collateral pool that supports our synthetic positions, so we wouldn’t be too badly affected by a liquidity squeeze. In fact, this collateral pool enables us to take advantages of dislocations in funding markets to provide liquidity. To us the bigger question is whether investors are being adequately compensated for this lack of liquidity and the answer is, probably not.

Q You are undertaking a review of your reference portfolio. What does this involve?
A
This is a five-yearly review where we look at all of our assumptions and assess the way we construct the portfolio. The reference portfolio is currently 80% growth assets and 20% fixed-income. We don’t go back to square one, but rather take a look at our experiences over the past five years, check which new indices have been created in that time and then ask whether our risk assumptions have changed as a result.

Q Do you find overlap in the risk profiles of your assets? Does it make sense to streamline the asset classes you invest in?
A
There are plenty of risk overlaps and it doesn’t pay to be too precise about how you categorise assets – it misses the point. For every opportunity we apply a consistent approach to risk. We break down the different risk components, determine how much we want to be paid for taking each risk, and then compare the attractiveness of investments. Our internal risk allocation process allows us to rank the effectiveness of each individual opportunity in a coherent fashion.

Q The structure of NZ Super has been in a constant state of evolution. What’s left to do?
A
We are in the middle of implementing a system of active risk budgeting and writing a policy manual for the use of derivatives. These tasks and processes have been handled effectively up until now, but we have reached a size where it is important to bring these processes together into comprehensive documents and with appropriate oversight. Once these have been implemented we don’t expect any more big changes. We are also considering the recommendations of our five-yearly external review regarding the appointment of a chief risk officer and a compliance officer.

Q  What is the biggest challlenge you see?
A
The real challenge will be stepping out of the markets when they go beyond fair value. It takes a lot of courage to do this when everyone else is piling in. When you are printing returns of 5% and everyone else is printing 13% you have to be strident about your convictions and be able to articulate them.