The New Zealand Superannuation Fund is the latest institution to reaffirm its commitment to growth investments by increasing its allocation to global equities.
The NZ$29 billion ($19.1 billion) fund has also appointed new heads of risk and compliance and is proceeding with its debt recovery case against the Bank of Portugal in the European courts.
The latest five-yearly review of the NZ Super Fund’s "reference portfolio", announced yesterday, has concluded that the fund should remain strongly weighted to equities.
The reference portfolio is the lowest-cost access to the most relevant, liquid market exposure the fund needs to meet its mandate. The fund’s supervisory board, the Guardians of NZ Super, expect the reference portfolio to return 7.7% over 20-year periods, which is 2.7% above the estimated risk-free rate.
Guardians chairman Gavin Walker said careful consideration had been given to the level of risk it was appropriate for the fund to take. “The fund’s long timeframe and certain cashflow mean it can take on more equity exposure than many other investors. We are prepared to weather volatility in fund returns as asset prices fluctuate, in order to maximise long-term performance.”
“Growth assets are volatile over short periods and not every individual investment will be successful,” said chief investment officer Matt Whineray. “Over time and as a whole, however, growth assets deliver a higher return than a lower-risk, less volatile investment strategy, as they are intrinsically linked to economic growth.”
Changes to the composition of the reference portfolio include increasing the allocation to global equities from 70% to 75%. Of this, 65% is targeted to developed markets and 10% to emerging markets. “This is a technical change - we believe emerging markets are under-represented in ‘all-world’ indices, and hence we are correcting for that,” said Whineray.
The NZ Super Fund was established in 2001 to help pre-fund universal superannuation benefits. It is not projected to start paying out money until 2031/32 and is expected to grow for many decades after that.
The Guardians introduced the reference portfolio approach to managing the Fund in 2009. Over its first five years, the portfolio returned 13.2% compared to an expected 8.5%. The risk (as measured by annual volatility) of the portfolio over this period was 8.4% compared to an expected 13.2%.
The reference portfolio’s existing 5% allocation to listed NZ equities remains unchanged. Whineray noted that the Fund’s actual portfolio currently has around 7% invested in listed NZ equities and a further 8% in other NZ assets.
The 5% allocation to global listed real estate investment trusts (Reits) has been dropped. Whineray said the Guardians believe the fund achieves sufficient exposure to listed real estate through its global equity exposure.
The Guardians will continue to hedge the reference portfolio 100% to the New Zealand dollar, meaning it is not impacted by changes in the dollar’s value. “This provides a very clear performance benchmark for any active currency investments we make outside the reference portfolio,” said Whineray.
Currently, around 70% of the fund is invested in line with the reference portfolio. “We only make investments outside the reference portfolio when we are highly confident that they will deliver a better risk-adjusted return,” said Whineray. The fund generated an additional 3.65% p.a. ($4.55 billion) over the last five years through active investment decisions made by the Guardians.
Having considered the recommendations of the five year review regarding the appointment of a chief risk officer and compliance officer, the Guardians have appointed Stewart Brooks, formerly GM Finance, to the new role of GM Finance and Risk. The fund is also appointing a new head of enterprise risk, yet to be announced. Compliance oversight will be undertaken jointly by the head of enterprise risk and head of portfolio risk, who will both report through to Brooks.
Meanwhile, the Super Fund’s legal case for debt recovery against the Bank of Portugal, previously reported, is proceeding in Portugal and in the UK courts. The fund reports “significant delays” in the Portuguese courts, adding it has been much easier to get things moving in the UK.
“We remain of the view that the Bank of Portugal has acted improperly and on a misunderstanding of crucial facts, and that we have a strong case,” said a spokesperson.
Additionally, in England the fund’s claim sits with the Commercial Court - a specialist sub-section of the Queen’s Bench Division, dealing with cases regarding banking and finance. Either way, however, it will be a lengthy process, said the spokesperson.
Last month, the Guardians appointed Northern Trust to manage a Barclays Global Aggregate fixed income mandate, incorporating the fund’s environmental, social and governance (ESG) exclusions.
The new mandate adds to the four passive global equity mandates awarded by the Guardians to Northern Trust in 2013. Whilst the mandate does not have a specific size, the Guardians require that none of their external managers manage more than 25% of the Fund’s net asset value.