Moves by New Zealand Superannuation Fund to cut back on riskier assets late last year look to have been prescient given recent falls in stock prices globally.

And markets are moving into a phase of more muted returns, argues Matt Whineray, chief investment officer of the NZ$26.7 billion ($21.3 billion) state pension. As a result, he doesn’t see NZ Super being able to sustain its strong performance of the past two years.

The fund’s long-term performance expectation is to beat the New Zealand Treasury bill return by at least 2.5%; in the past two years it has beaten them by 23% and 16%.

“We don’t think this pattern will continue,” said Whineray. “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 the fund expects its reference portfolio to return around 7-8%.  

Concerns about high valuations and potential pitfalls led the institution to reduce its risk allocations late last year.

“There aren’t a great deal of opportunities at present, just potential threats, which is why we have been reducing our active risk,” he added. “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.”

But cutting positions when asset valuations across so many markets are riding high – and many are tipping them to continue rising – is not easy to do.

It’s a challenge to exit markets when you feel they have gone beyond fair value, said Whineray, as he feels they had as of November last year. “It takes a lot of courage to do this [cut positions] when everyone else is piling in,” he added.

“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.”

Given this market environment, one approach NZ Super has adopted is to take on bigger mandates with fewer external managers, so that it has more flexibility around how the capital is allocated and how much is invested.

Meanwhile, the fund is in the process 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,” said Whineray. “Once these have been implemented, we don’t expect any more big changes.

NZ Super is also considering the recommendations of its five-yearly external review regarding the appointment of a chief risk officer and a compliance officer.

A full interview with Matt Whineray appeared in the latest (December/January) issue of AsianInvestor magazine.