NZ Super to offer more active mandates

The $19 billion New Zealand state retirement fund says it is considering new investments in life settlements and alternative energy, and discusses how it selects managers.
NZ Super to offer more active mandates

After posting its strongest-ever result from active investment activities, the New Zealand Superannuation Fund is reviewing plans to invest more in emerging markets and energy-related assets.

These value-added plays help NZ Super achieve a high level of diversification as well as improve returns, says head of investments Fiona Mackenzie.

“For any new investment, we must be confident that it is better than the simple, low-cost, passive alternative – that it will actually add value,” Mackenzie tells AsianInvestor. “Right now we’re looking at possible new investments in life settlements and alternative energy.”

NZ Super was set up to help cover the rising cost of the country’s universal retirement scheme and will start paying out money in 2029. It made its first investments in September 2003, and so far the government has contributed $12.6 billion to the fund.

Last Thursday it released its 2012/13 annual report detailing a 25.83% return for the financial year, boosting the fund to NZ$22.97 billion ($19.42 billion) before tax.

The result translates to an annualised return of 8.84% over the past 10 years, 1.14% ahead of its reference portfolio benchmark – an internally set notional portfolio of passive, low-cost, listed investments split 80:20 between 'growth' and fixed-income assets, and 100% hedged back to NZ dollars.

All value-added investment decisions are measured against the reference portfolio, and in the 2013 financial year, the fund’s active investment activities added 7.36%, or $1 billion, to the fund, its best ever result.

Mackenzie says the absence of immediate cashflow demands gives NZ Super a unique ability to consider long-term investment opportunities that may not appeal to others. “We know there won’t be any drawdowns on the fund for another 15 years, so we can weather some short-term volatility and take a contrarian approach,” she notes.

“We like to buy real assets when other investors are selling them,” says Mackenzie. “If we see a gap between the value of a particular investment and the current market price, and we take a view on the long-term prospects for the business, we find it usually comes good over time.”

One such bold move was the purchase of a struggling local fuel transport company called Z Energy, which NZ Super bought in conjunction with Infratil in 2010. Following an injection of capital and a rebranding exercise, the owners opted to reduce their stake via a partial listing in August. The deal netted NZ$420 million for NZ Super.

Mackenzie says the fund has been building its internal investment capabilities, but the bulk of the portfolio is still run by external managers.

Last week it contracted Northern Trust’s asset management arm to run four new passive equity mandates tracking global large-cap, global small-cap, developed emerging markets and developed real estate investment trust indices.

This follows a similar deal with BlackRock Investment in June, involving another four passive mandates covering the same asset types. BlackRock has been managing a fixed-income mandate for the fund since 2010.

The size of the new mandates has not been disclosed.

Mackenzie says the fund has also made some significant active allocations this year, which include a €155 million European distressed credit mandate awarded to Boston-based Sankaty Advisors in February and a $275 million mandate for London-based Leadenhall Capital Partners in May. Leadenhall specialises in natural catastrophe reinsurance-linked investments.

At the same time, some external relationships have been terminated. The annual report shows four absolute-return global equity managers were sacked during the year, including AQR Capital Management, LSV Asset Management, Numeric Investors and Thompson Siegal & Walmsley.

“The terminations reflect [our] view that active stock selection strategies in global large-cap and US small-cap equity markets are less attractive than they have been in the past,” says the report, without disclosing mandate sizes.

Mackenzie says NZ Super uses slightly different criteria when selecting passive managers versus active ones. “For passive managers, we focus on their technical capabilities, tracking errors, transaction costs, trading efficiencies and whether they comply with our ESG [environmental, social and governance] exclusions,” she says.

For active managers, Mackenzie’s team applies three broad measures, but only after an independent decision has been made to invest in a certain asset type. “Once we are committed to making that investment, we look for a manager that best matches the specific opportunity,” she says. “Then we test their ability to deliver on the strategy by looking closely at the management team, their internal capabilities and systems, and their long-term viability.

“Finally we take into account our ability to form a long-standing relationship with the firm," adds Mackenzie. "We are a relatively small team based on a distant island, so we want to form partnerships with firms that can openly share ideas and views with us.”

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