NZ Super performance beats expectations

With the state fund's growth portfolio driving returns, CEO Adrian Orr says NZ Super will retain its focus on such assets, as it makes more investments in private equity and factor strategies.
NZ Super performance beats expectations

New Zealand’s NZ$32.7 billion ($23.7 billion) state pension fund returned 13.2% last year, showing the benefits of a continued to commitment to growth assets, said chief executive Adrian Orr.

This will be particularly pleasing for the institution after it returned 6.5% in 2015 and had warned that this reflected a likely trend of lower returns in future years.

Echoing comments made by other institutional investors, including Peter Costello, chairman of Australia's Future Fund, Orr cautioned that the global economic environment continued to be challenging, with attractive opportunities often chased by an abundance of capital. Other large, respected asset owners, such as Singapore's GIC, have made similar comments in the past year.

Nonetheless, Orr reaffirmed New Zealand Superannuation Fund’s commitment to a diversified growth stance. “While we will continue to see a range of outcomes from individual investments and over short time periods, the fund is well diversified, and its performance to date continues to exceed expectations.”

Since its inception in 2003 the fund has returned an annualised 9.9% and since 2013 has comfortably outperformed its two performance benchmarks, a market 'reference portfolio' return and the New Zealand Treasury Bills (see chart, below).

Performance of NZ Super Fund since inception

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“Over the last year, global equities have continued to perform above our long-run expectations,” said Orr. “Looking forward, we expect equity performance to return to a more normal level.”

In the fourth quarter of 2016, the fund appointed AQR Capital to manage a $500 million index-relative factor strategy mandate, following its first $250 million foray into smart beta investing with Northern Trust last August.

Orr (pictured left) said the fund's priorities for 2017 included implementation of its climate change strategy and continuing the establishment of an investment hub to help source opportunities domestically.

NZ Super has also added to its portfolio of New Zealand dairy farms. It now owns 21 farms and has invested a total of NZ$260 million ($189 million) in the sector.

Private equity plans

Moreover, the fund said in December that it would invest up to NZ$260 million in small and medium-sized New Zealand companies via private equity funds over the next five to 10 years. It will also invest up to NZ$90 million in Direct Capital’s Fund V, up to NZ$120 million into Pioneer Capital’s Fund III and up to NZ$50 million into Movac’s Fund IV.

The three mandates target different parts of the private equity market in New Zealand, with Direct Capital operating at the larger end of the growth spectrum, Pioneer targeting mid-market companies seeking international growth, and Movac focused on earlier-stage, high-growth technology companies. NZ Super expects each fund to invest in eight to 15 companies.

Chief investment officer Matt Whineray said NZ Super had been investing in this sector since 2005. Previous investments of this type have delivered net returns of about 15% a year.

He noted the fund’s in-house investment team would continue to focus its efforts on listed equities and larger-scale investments (of NZ$100 million or more), along with the fund’s rural and timber holdings.

NZ Super has NZ$4.9 billion invested locally, including more than $1 billion in New Zealand stocks and big private investments in Kaingaroa Timberlands, Datacom and Kiwibank.

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