Going opportunistic

Matt Whineray, general manager of investments at New Zealand Super Fund.
Going opportunistic

New Zealand Superannuation Fund was set up by the government in September 2003 to help pre-fund future universal superannuation entitlements. Withdrawals are not scheduled to start until 2029/30.

The Auckland-based fund has posted before-tax, after-costs return of 7.56% a year since inception, and as of 31 October had NZ$20.17 billion ($16.4 billion) in assets.

Q What are NZ Super Fund’s investment and return targets?

A Our legislated mandate is to maximise returns without taking undue risk. To do that, we use a reference portfolio, or RP, with a certain level of acceptable volatility.

Over the long term (rolling 20-year periods), we expect the RP return to exceed New Zealand Treasury bills by at least 2.5% per annum on annual volatility of 13%. We also expect to beat the RP by 50-60 basis points a year over time, and have done so by 51bp annually since inception.

Q Why switch to a reference portfolio?

A We previously used traditional strategic asset allocation, but we moved to the RP two years ago. It’s a very clear benchmark, containing only listed assets we can access passively. Every time we step away from it, we have a clear test of whether we’ve added value versus the RP.

The key point is that we don’t now have any pre-specified allocations to asset classes such as alternatives. We’re much more flexible and opportunistic in our approach.

Q How is the RP broken down?

A The RP is 80% in growth assets and 20% in fixed income. Growth assets comprise 70% in global equities; 5% in real-estate investment trusts; and 5% in New Zealand equities.

Currently, our actual portfolio (pre-strategic tilting) is around 70% equities, including Reits; fixed income is around 9%; and private-market assets around 21%.

Q That’s a big overweight to alternatives – why?

A The alternatives allocation has been steadily rising, with the two biggest chunks being infrastructure and timber. That’s about three-quarters of the private-market portfolio. The rest is in private equity, rural/ agricultural type assets and other alternative strategies. The primary reasons for adding this exposure are better diversification and an expectation of excess returns.

This has meant the value of our New Zealand investments has risen almost 50% from NZ$2.5 billion to NZ$3.7 billion since 2009. More than half of these are now private-market assets. There are no legislated limits on the amount of alternatives or foreign assets we can hold.

Q Beyond the RP, do you use benchmarks for specific assets?

A Our listed equity portfolios all have standard market capitalisation-weighted benchmarks, such as the MSCI World index.

One way we access global equities is passively, by taking derivatives positions using futures or swaps on the MSCI World. This means we can alter our overall portfolio positions very quickly.

For other investments – including private equity assets, timber, farmland – we have other benchmarks we calculate internally.

Our portfolio is roughly 60% passive and 40% active.

Q Do you have constraints on what fixed-income investments you can make?

A There are no limits on the grade of bonds we can invest in as there might be for, say, a reserves manager. We can invest in distressed assets or high yield, and we do so from time to time.

Q What is your allocation by geography?

A That’s largely down to the completion of our RP, with the largest component, global equities, benchmarked against the MSCI All World. The main departure from this is that we are overweight New Zealand assets.

The biggest allocations are to North America (31%), New Zealand (26%), Europe (21%), Asia (10%) and Australia (9%), and it falls off quickly after that.

We continue to see cap-weighted indices as most appropriate for the RP. We do consider alternative weightings, but see these more as an active position relative to market cap-weighted indices.

Q How big is your investment team?

A Out of NZ Super’s 75 staff, we have 32 on the investment side, covering portfolio completion and management, trading, asset allocation, investment analysis, external manager selection and monitoring, and direct investment.

The six-strong portfolio-completion team manages our liquidity pool (cash and cash-like instruments), derivatives and FX books.

Q How much do you use external managers?

A Our portfolio is roughly split 50/50 between in-house and external management.

We tend to do the passive investment internally, using derivatives positions. All internal FX hedging is done in-house, as is the passive NZ equity portfolio. Some of our timber investments are managed in-house, along with other close-to-home assets.

But some domestically focused direct investments are outsourced, such as our 50% stake in Z Energy, a major fuel supplier.

External managers also run some passive portfolios and active listed-security mandates for us, largely in segretated accounts. Also, most international private-market investments are run externally.

Q Has the passive/active breakdown changed in recent years?

A On the external side, we’ve introduced some new active strategies in the past five years, such as insurance-linked securities, and made more PE commitments. But the amount in externally managed active listed portfolios has probably fallen.

Internally, we’ve increased our activity on the passive side in particular and are also looking to do more in-house on the active side, both in listed and private markets.

Q For alternatives, do you invest via funds or funds of funds?

A For PE, we go direct into funds. We have a couple of legacy funds of funds, but very small positions. We also have a couple of private-market segregated infrastructure mandates, and investments with a number of hedge funds.

Q Do you use exchange-traded funds?

A We haven’t used ETFs yet; we find we are more nimble using synthetic positions for tilting and rebalancing. And we don’t use ETFs for accessing specific markets.

Q How do you conduct your research?

A We mostly research managers of listed equities ourselves, but we have consultants to help on unlisted assets. We have one consultancy for PE and one for real estate. Our staff do a lot of manager-selection and monitoring work.

Q How do you manage risk?

A Our risk management is mostly done through allocation rather than derivatives. We don’t do any tail risk hedging. The fund can handle a fair bit of illiquidity and volatility.

On the currency side, over the last year or so we have been underweight the New Zealand dollar relative to the RP’s position of hedging 100% back into NZD. We use FX and interest rate swaps and forward contracts, and we manage our own collateral.

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