New Zealand's NZ$43 billion ($27 billion) Super Fund weathered an unusually volatile period at the turn of the year, thanks to some active decision-making outside of its passive reference portfolio.

According to the fund’s monthly return data, published on its website, the fund suffered three down months of between -4% and -5% in the eight-month period from October 2018 to the end of May this year.

To put this in perspective, in the previous two years, going back to October 2016, the fund only experienced two down months, of less than 2% in both cases.

The bounce-back in early 2019 was dramatic. The fund returned -4.84% in December 2018, but then rebounded to return 5.23% the following month. There was, however, another -4% result in May this year.

Chief executive Matt Whineray said that the 12 months to the end of May was a good example of the volatility inherent in a portfolio weighted towards growth assets.

“It was literally a year of two halves. Negative returns from growth assets over the first half of the year saw the fund decline to a low point on Christmas Day 2018, before rebounding strongly." 

The fund finished the year up just over 7%.

Whineray told AsianInvestor that active management was "a large driver of value add in the past year".

"Active management refers to investments made outside of our reference portfolio, where we have taken more risk in order to generate additional returns. It covers activities like active equities, arbitrage, strategic tilting, real assets, emerging markets, timber and liquidity management.

"The strategy rebalances the fund to our desired reference portfolio weightings and manages liquidity risk in the most efficient manner possible," he said.


Matt Whineray
Whineray noted that the climate of global volatility has coincided with a time when central bank policy decisions and trade tensions between the United States and China are driving asset price values across the world. As a long term investor, the fund has the ability to look through and profit from those periods of uncertainty and volatility, he said.

Other value-adding contributions to the fund's bounce-back came from direct investments in privately held companies such as NZ tech company Datacom, carbon recycling firm LanzaTech, renewable energy firm Long Road, and high-tech glass manufacturer View.

The fund also benefitted from strong returns from its real asset investments, an internally managed credit mandate and the fund's strategic tilting programme, which alters exposures to equities, bonds, credit and currencies as valuations peak. "It is a mean reversion-based dynamic asset allocation strategy," said Whineray.

The fund’s asset size has been boosted by the continuing capital contributions made by the current New Zealand government. Payments resumed in December 2017 after an eight-year suspension. Capital contributions during the financial year totalled NZ$1 billion.

The fund has returned more than 14% per year over the last ten years, but Whineray, in common with his counterparts at Australia’s Future Fund, predicts that the next 10 years may be quite different.

“Given the market environment, we expect returns over the next few years will be possibly lower than our long-term expected average,” he said. He added that the investment team is continuing to look for good buying opportunities in the midst of market volatility, while taking a stance, as others are doing, of reducing active risk in the portfolio.

Active risk, in the context of NZ Super, means investments made outside of the passive reference portfolio, a rebalancing process that takes the investment mix closer to the passive portfolio when the internal managers don't think there is much in the way of additional returns to be had.