New Zealand Super is seeking to build out its resources in real assets and data analysis and technology, as well as continuing to raise its game in responsible investing, as part of ongoing efforts to ensure it can keep growing and absorb further funds from the government over the coming decade.
Stephen Gilmore, chief investment officer of the NZ$47.05 billion ($30 billion) sovereign wealth fund, said it is likely to continue receiving contributions until the mid 2030s and is unlikely to have to make major redemptions back to the government until the mid 2050s, to support growing retirement needs.
According to the New Zealand government's contribution model forecasts, NZ Super is likely to receive NZ$2.4 billion to NZ$2.5 billion annually from the government until 2025, slowly dropping below NZ$1 billion annually in the years afterwards.
That gives it a long timeframe during which its assets will keep rising. It needs to work out where to allocate these inflows in a manner that best suit a high-growth model that allocates most of its assets to listed equities and real assets, Gilmore said.
“We are thinking which areas of investments are scalable from our perspective and whether we need new capabilities [to effectively invest the funds],” he told AsianInvestor. “We have identified some areas we want to increase our capacity to scale up in. Some are in terms of cheque size, and we are also increasing resourcing our skillset in the real asset space, bringing in real estate and infrastructure [capabilities].”
That will likely include more inhouse expertise, including new hires – including one joining shortly in real estate, as the fund looks to outperform its passive reference portfolio benchmark, which consists of 80% international equities and 20% bonds. Gilmore declined to reveal the identity of the new person, or specific areas on the asset classes at which it was looking.
In addition to adding resources for real asset investing, the fund is increasingly looking to add more data capabilities to better support its investment processes.
“An area of focus and thinking is data governance and data as a service,” said Gilmore. “As time goes by the boundaries between a typical investment person and a tech person will narrow. Now when we are recruiting we pay more attention to that.”
Another NZ Super priority is maintaining its commitment to responsible investing. The asset owner has led much of the world on its efforts to reduce the carbon emissions intensity of its portfolio by 20% and its ownership of fossil fuel reserves by 40% by 2020; it hit those targets last year and now wants to respectively cut them to 40% and 80% by 2025.
NZ Super CEO Whineray also explained to AsianInvestor that NZ Super's environmental, social and governance-friendly investments helped net 60 basis points in additional returns since 2017.
"When we are thinking about making an investment, we think carefully about [ESG] aspects; it's partly about risk minimisation and partly about the quality of investment," said Gilmore. "We had some pretty good examples where it really paid off for us in terms reduce risk or improving returns."
He added that the fund is wary of complacency, noting that what is considered best practices of investing and reputation evolves over time. “Others are catching up and we need to think carefully what happens to our social licence through time and put a concerted effort into responsible investment and where want to be over next decade or so in terms of specifics.
“We need to stay conscious of our mandate, to ensure the best management practice of our portfolio without taking undue risks to reputation.”
As it incorporates responsible investing, the fund will also need to accept volatility and the odd failure. This week, news emerged of a $112 million write-off NZ Super took on an investment in fuel-cell maker Bloom Energy.
Gilmore was philosophical about the experience, noting that direct investments do not work every single time, but what is important is that the asset owner learns from what went wrong.
“Losses on some of these things are inevitable,” he said. “If you have high growth, high risk portfolio like we do, there are times when assets disappoint. I’d suggest if you didn’t ever have any of those then you are not taking enough risk.”
He added that it was important to "learn lessons and also have retina discipline".
"When we have something in the portfolio you can get captured by that and need to ask youself 'if you didn’t have it in the portfolio, would it make it today?' So we came to the conclusion that our capital was better allocated elsewhere and so sold it."
INTEREST RATE CONSIDERATIONS
As NZ Super plans for the future, it is keeping a particularly close eye on interest rates. Its projection is that real global interest rates will be 0.5% over the long term. However, Gilmore admits that this outlook might be too optimistic.
“Rate calls are consistently the most challenging [for our tilting programme], and they have tended to be lower than priced in by most forecasters and we have been no exception to that,” he said.
It’s an area of constant focus, as the fund assesses how much risk to take in its portfolio. “We have a lot of debate around real interest rates and look to the really long term – think multiple decades – and are reasonably comfortable. Plus, the equity risk premia at the moment is relatively attractive … relative to interest rates. But we need to be open to potential structural changes.”
One could be inflation. Ever since the early 1980s, a combination of monetary policy, technology improvements and globalisation has helped keep price hikes under control. But given the massive levels of debt, many governments have taken to afford stimulus for their economies and recent de-globalisation efforts mean the possibility of inflation does linger.
“If [these trends] stop or reverse, we have to think about how that impacts our portfolio assumptions,” said Gilmore. “From a portfolio perspective, if inflation goes up and real rates go up over the long horizon, it may not be so bad. Over the shorter term, if there is high inflation and low growth, it would be more of a problem.”