Matt Whineray, the new chief executive of the New Zealand Super Fund (NZ Super), is continuing many things from his predecessor, most particularly its high risk, contrarian style.
The former chief investment officer stepped up in June after Adrian Orr departed for the Reserve Bank of New Zealand. And one of the first things Whineray did was to decide to emphasise exactly how much risk NZ Super took on board with its approach to its stakeholders and the public at large.
In particular, the fund laid out in its latest annual report in October how its NZ$39 billion ($25 billion) asset base, which has an 80% equities slant, would be affected were another global financial crisis (GFC) to take place.
It makes for grim reading. Over a 10-month peak-to-trough period of a new crisis, Whineray’s team estimates NZ Super would lose $20.3 billion (-52.6%), as its reference portfolio benchmark dropped 44.7%. Its losses would be higher because its strategic tilting programme would lead it to buy more growth assets as they fall in value.
“From peak to trough in the GFC you could be down around 50%,” Whineray explained to AsianInvestor.
Why did he want to make this so clear?
“We felt it was important to encourage stakeholders to understand that the main challenge in persisting as a long-horizon investor is in looking through short term shifts in value and focusing instead on more appropriate and long term metrics of success,” he told AsianInvestor.
“We’ve got the ability to cope with those fluctuations as long as we know what our liquidity is,” he added. “As a long horizon investor, we should be able to ride through this and get paid. That’s why you get the equity risk premium. It’s a deliberate choice.”
The New Zealand government appears to believe in its approach. In December 2017 it ended a funding freeze since the GFC, and is set to contribute $500 million in the 2017/2018 financial year. This will rise to $2 billion per annum in three years’ time.
The additional funds are initially applied to the reference portfolio, until such time as the investment team decide to do something active with them.
Whineray said there are no conditions attached to the funding.
“That’s a critical point; it is important we have our operational independence and retain our sovereign status. The Crown can give us some directions about their expectations as to risk and return but that’s it.”
It’s easy to see why NZ Super still has Auckland’s faith. The fund returned 12.43% in the 12 months to June 30, beating its reference portfolio by 2.02%. It exceeded the average return on treasury bills, its other benchmark, by 10.71%. Over its entire lifespan it has returned 10.37% per annum.
Whineray said three reasons underpinned its latest figures: its strategic tilting, in which NZ Super adjusts its exposure to different asset classes over time; timber, primarily its 42% stake in Kaingaroa Timberlands; and an internally-managed credit mandate.
The tilting process seeks to leverage on the fact that markets are reasonably efficient at incorporating information, but swing too far from time to time.
NZ Super uses analytical models to assess equities, global bond markets, plus some credits and foreign currencies, to identify fair value and where prices have moved too far out of fair valuations.
“As the asset class starts to diverge from [fair value], we will start buying it and we don’t wait until it’s bottomed out,” he said. “Our models tell us what those values are within a risk budget for each batch of assets.”
That includes comparing the relative risk in one asset class versus another, or comparing one type of asset such as emerging equities against other stock categories. NZ Super then creates various positions using futures markets, on the basis of their ease of trading for large liquid markets.
“All of the tilting is about being in big, liquid markets,” said Whineray. “We don’t try and tilt the New Zealand equities market, or other smaller markets.”
That approach to risk management is what gives NZ Super its edge. But it also leaves it exposed to a lot of potential volatility. For Whineray, telling the truth about that risk makes more sense than trying to downplay it.