NZ Super underlines long-term views amid criticism

The superannuation fund's CEO, Adrian Orr, reaffirms its philosophy of long-term investing after media criticism of losses it suffered in a loan investment to a failed Portuguese bank.
NZ Super underlines long-term views amid criticism

The chief executive of the New Zealand Superannuation Fund, Adrian Orr, has reiterated his “unshakeable belief" in taking a long-term view for investment. It comes after - although not in response to - media criticism of losses the fund suffered in a loan investment to a Portuguese bank.

The NZ$27 billion ($20.1 billion) fund, which late last year won one of AsianInvestor's inaugural awards for institutional excellence in the field of governance, has been under fire at home for an unusual blemish on its record of investing, which it reported on February 19.

NZ Super is widely recognised for having one of the most robust and respected investment processes among sovereign funds in Asia Pacific, with a reference portfolio for low-cost passive global exposure and a risk-allocation process for active investment decision-making.

The fund’s investment returns have averaged 9.8% since 2003 and in the past two years it has recorded gains of 24.3% and 17.5%.

Nevertheless, NZ Super recorded a $150 million loss on a loan investment to the failed Banco Espirito Santo in Portugal last year, a deal arranged by Goldman Sachs.

The bank failed in August 2014 and the insurance arranged by NZ Super, in the form of credit default swaps issued by Goldman Sachs, would have covered the loss.

However, the Bank of Portugal, in separating solvent and insolvent parts of the failed bank, placed the Goldman vehicle used for the loan, Oak Finance, into the ‘bad bank’ category, invalidating NZ Super's insurance in the process.

NZ Super has argued it could not have foreseen this move by Bank of Portugal. Goldman, NZ Super and other investors* are now involved in legal proceedings in the English courts in an effort to recover losses.

An official statement on behalf of Oak Finance investors stated, "these investors will also be filing public law proceedings in Portugal against the Bank of Portugal.

"Although the Bank of Portugal has been provided with the facts that would require it to reverse its decision, the Bank has refused to do so."

A spokesperson for Goldman Sachs separately confirmed that it intended to pursue "all appropriate legal remedies without delay". The US bank alleged factual errors and violation of the principles of due process and fairness by Bank of Portugal.

Orr has said the fund expects to recover the money, but has nonetheless made provision for the loss in its latest filing in New Zealand.

An official statement from the NZ Super attempted to put the loss in perspective, with respect to the size of the fund and overall success of its investment policy. “The strategy [for investing in loan structures] has been in place for a number of years and has been successful over time and when considered as a whole,” said the fund's head of communications Catherine Etheredge.

In reiterating the long term philosophy, Orr stressed that for a fund like NZ Super to be successful, “the discipline must be institutionalised."

He stated certain institutional characteristics had to be to the fore, including a commercially focused mandate with a board of directors that independently decides on a desired risk-return profile and strategy for the fund; board support of management in the execution of the strategy; limited claims on capital; sufficient liquidity; and generally low levels of peer and agency risk.

Orr noted that financial markets were not perfect, adding: “Short-term behaviour is both a cause and a consequence. Our view allows us to be more level-headed, to discount short-term manias and panics in equal measure, and to seek long-term profit from these instead.”

The fund characterises investment themes as the long-term secular influences on the global economy “that are inexorable and invariant to business cycles”, said Orr. He highlighted global warming and urbanisation of developing countries as themes that would play out over generations, irrespective of periodic booms and busts of the global economy.”

Meanwhile, NZ Super and the Government of Singapore Investment Corporation (GIC) are among the contributors to a newly released white paper on long-term investing. 

The white paper, entitled Long-term Portfolio Guide, is an output from an initiative comprised of investment professionals from the Canadian Pension Plan Investment Board, PGGM, Washington State Investment Board, BlackRock, Fidelity, GIC and NZ Super.

It was designed to develop practical ideas for how institutional investors might reorient their portfolio strategies and management practices to emphasise long-term value creation and, by doing so, be a powerful force promoting a long-term mindset throughout the investment value chain.

The result of this work provides recommendation across five core action areas: investment beliefs, risk appetite, benchmarking, evaluations and incentives, and investment mandates.

Using real case studies from each contributing institution, the report makes a case for creating a sound governance structure as the basis for the investment process. To read the white paper, please click here.

*The other investors include ANDBank, Avenue Capital, Elliott Management Corp, Karrick, Silver Point Capital, FFI Fund, FYI Ltd, Olifant Fund and TDCPensionskasse.

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