NZ Super grows cautious over private asset additions

The sovereign wealth fund has become more cautious about private asset investing, worried that they may struggle to outperform its reference benchmark, net of an illiquidity premium.
NZ Super grows cautious over private asset additions

New Zealand Superannuation Fund (NZ Super) is in the midst of conducting an extended bout of self-analysis, as it aims to ensure it remains market leading in its own governance and methods.

As part of this process the fund is considering its investment approach, and its own organisation.

One area in which NZ Super's investment team has become particularly cautious is in adding illiquid new assets. The sovereign wealth fund takes pains to ensure that prospecive new investments will do particularly well to outperform the returns offered by its reference portfolio. 

“When it comes to direct investments, for example, a forest, we need to load an illiquidity premium to any new asset, on the basis that if we sold it tomorrow we would not be able to realise a similar value,” said David Iverson, head of asset allocation at NZ Super. “We add other penalties for concentrating the portfolio in New Zealand or committing assets to emerging markets.

“So for example, we might need a forest to give us 8% instead of 5% annual return. We apply that framework to every single asset in the portfolio. So if it was a hedge fund we were buying for exposure to catastrophe bonds, or a bridge in Timbuktu, the same applies.”

This also the sell signal for the internal team. If the asset appreciates to the point where the expected return looks set to fall below the reference portfolio, it is sold and the proceeds revert to the passive reference portfolio. 


The self analysis has been conducted in coordination with Willis Towers Watson, which released a report on its findings of how NZ Super operates. In addition to reviewing the fund's investment framework, the WTW report recommended changes to the fund’s organisational structure. 

“They thought there should be more variable components in our compensation structure,” noted chief executive Matt Whinery. Particular attention was paid to diversity. 

This is an issue that institutions have to address with greater urgency, as pressure comes to eradicate things like the gender pay gap and a dearth of women in senior management positions. 

Whineray said NZ Super is an equal payer but he acknowledged that it does, in common with other institutions, have a gender pay gap “because we’ve got insufficient women in senior roles.” The way it is addressing this is to develop its own talent and demand its recruiters emphasise diversity at
the outset of a search.

We’ve got insufficient women in senior roles

The fund’s environmental, social and governance (ESG) credentials are strong, with it having committed to ensure all investments are at least carbon neutral. In fact, Whineray said they give equal importance to the E, S and the G. 

“The social media engagement is a new one for us, because we don’t normally do public engagement,” he said of the fund’s commitment to the Christchurch Call, the campaign begun in the wake of the mosque shootings in the south island city earlier this year. 

NZ Super’s head of responsible investment, Anne-Maree O’Connor, spoke at the recent UN Climate Change Summit on policy responses to the various ESG issues, including the dangers posed by social media. 

The public engagement on this issue was effective in bringing other major investors on board on the basis that combined pressure has a greater chance of success. 

By speaking to companies with a unified voice, O’Connor said investors can more effectively communicate their concerns to corporate management. “The result is typically a more informed and constructive dialogue,” she said.

NZ Super is not standing still – the fund is taking seriously its role as a sovereign investor and responsible global citizen across its entire operation. 

Regional and global asset owner peers will no doubt be keen to know how it intends to further improve itself, when it announces the review of its reference portfolio in mid-2020.

This article was adapted from a feature that originally appeared in AsianInvestor's Winter 2019 edition. 

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