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How NZ Super posted record year amid Covid market shock

Utilising strategic tilting and its long-term reference portfolio, NZ Super Fund has leaned into the pandemic market disruption of 2021 to post record returns.
How NZ Super posted record year amid Covid market shock

The New Zealand Superannuation Fund (NZ Super) won in several categories at AsianInvestor’s 2021 Institutional Excellence Award, including an institutional award for “Best Asset Owner – Regional” as well as a proficiency award for “Best in Class – Climate Change Policy”.

Alice Mew,
NZ Super

 “We were delighted and proud to win these awards, and to be among such a strong group of peers. I think it's great recognition of the hard work by our team over the last year or so,” NZ Super’s investment committee chair Alice Mew told AsianInvestor.

Although the global pandemic has led to a lot of upheaval and uncertainty in the investment landscape, NZ Super posted its highest ever financial return of 29.6% by the end of its financial year in June 2021, through its ability to adapt to and take advantage of the “Covid shock.”

“NZ Super is heavily weighted to growth assets, such as shares, we've got a reference portfolio, which is 80% shares, 20% fixed income, so we have quite a high growth/high risk portfolio,” said Mew.

“We make this choice to meet our purpose over the long term, but it means that we're sensitive to market movements along the way, so the pandemic definitely tested our assumptions and our long-term strategies.”

The NZ Super’s reference portfolio is a simple portfolio of passive, low-cost, listed investments suited to its long-term investment horizon and risk profile, which gives the fund a high tolerance for illiquidity and the ability to take advantage of an event like the Covid market disruption.

“We also have a couple of counter cyclical strategies, things like strategic tilting,” she said.

Essentially, strategic tilting is a value-adding strategy employed by the fund which increases exposure to cheap assets and decreases exposure to expensive assets based on price and long-term valuation signals.

“This takes advantage of the market volatility and illiquidity and means we can actually lean into markets when risk sentiment is lowest,” said Mew. “It means we can actually benefit from buying up when everybody else is selling, and then benefit from the rapid rebound.”

RESPONSIBLE INVESTMENT

NZ Super has employed climate change strategies since 2016, but over the past year has shifted to more ambitious targets which include reducing its own carbon footprint and exposure to fossil fuels in its portfolio.

In 2021, the fund managed to exceed its 2025 target of reducing emissions intensity of the portfolio by 40%, and its exposure to potential emissions from reserves by 80%.

“This doesn't mean we'll stop there, but we've actually beaten our ambitious 2025 target already,” said Mew.

In addition, the fund has also signed up to the net-zero commitment of the Paris-aligned Investment Initiative - to transition its portfolio to be aligned with zero emissions by 2050.

Beyond climate change, Mew said the fund is also in a period of reviewing its responsible investment strategy to meet the evolving stakeholder expectations and behavior of investors.

“We call it resetting our responsible investment compass or framework, which has been in place for about 10 years now,” said Mew. “The focus we're now going to have is sustainable finance, which effectively means we're switching from thinking primarily about how the world impacts our portfolio to thinking about how our portfolio impacts the world.”

“We're in the midst of implementing that at the moment and embedding those sustainable finance principles into everything we do.”

REAL ASSETS

NZ Super manages around $40 billion in assets for the New Zealand government, and these funds are always fully invested in an equilibrium portfolio - its reference portfolio - with a long horizon and an average amount of active risk budgeted over that term.

“At any given time, our actual active risk can fluctuate around the long-term budget depending on our view of the attractiveness of underlying opportunities, which is kind of the shorter term concept,” said Mew.

A notable change in NZ Super’s active risk over the last 12 months is the fund’s allocation to real assets, a trend which Mew expects to continue. With a focus on scalability, the fund has added capacity in terms of people and expertise to ease previous internal constraints and allow an increase in investment in real estate and infrastructure.

“We’ve hired investment specialists who have led the development and consequent implementation of real estate and infrastructure strategies and we've been pleased with how that's worked. It's increased our investment a lot in the space,” she said.

 “We've got specific sectors that we're focused on such as living logistics, technology orientated real estate, infra strategies focused on energy transition, digital infrastructure, and in future growth.”

Within real estate, Asia Pacific has been a particular focus for NZ Super, due to favorable demographics, market dynamics.

“We have favoured developed Asia to date — China, Korea, Australia, and Japan which have greater liquidity, but we're also keeping an eye on Southeast Asia,” she said

Last year NZ Super invested $150 million into CBRE’s Asia value partner’s fund, which focuses on logistics property developments, predominantly in China, South Korea and Japan.

“We do have an infrastructure portfolio in Asia as well, but in particular there are a number of other exciting real estate opportunities in the region that we are investigating currently.”
 

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