By September the NZS will have five years of performance to look back on and will probably be feeling pleased with itself. Since inception in September 2003 the Fund has returned 11.49 per cent, beating the risk-free rate of return (based on NZ Treasury bills) by almost five per cent – well above its target of 2.5 per cent over the risk-free rate (although ultimately this benchmark will be judged over rolling 20-year periods).
According to NZS 30-year return projections, the odds look good for meeting those objectives. At a recent conference in Auckland, NZS head of strategy Tore Hayward said the NZS models suggested there was a more than 90 per cent chance the Fund would at least beat the risk-free rate over 30 years.
In addition, Hayward said a comparison of possible portfolio risk profiles showed that over a 30-year period a higher risk profile was justified. “The really interesting thing is that when you look down at the tail when things went badly down at the 1, 2 or 5 per cent of worst possible outcomes they didn’t actually look to be much worse than if we had a lower risk profile,” he said.
Hayward said the 30-year projections suggested that the NZS current risk profile had a 6 per cent chance of generating a three-year negative return at any time – a probability that went up to 7 per cent for the high-risk model and down to 4.5 per cent for the lower risk portfolio.
The modeling also predicted a 75 per cent chance of one period of three-year negative returns over a 30-year timeframe for the existing NZS risk profile. However,
Hayward added the caveat that the return predictions depended on the equity risk premium staying “in the ballpark of what we expect” and that equity returns would be more stable over long periods. Interestingly, Paul Dyer – the former NZS chief investment officer – was allegedly sacked by the NZS in March after a disagreement about the healthiness of the equity risk premium – a charge denied by NZS, which claimed his departure was prompted by a “restructuring” exercise that had left the CIO position “redundant”.
Meanwhile, NZS is now edging close to $15 billion under management and is projected to hit close to $110 billion by 2025.
Following the March restructure, NZS now has eight direct reports to the CEO, Adrian Orr, and has since hired Neil Williams as head of public markets and Matt Whineray to the newly-created position of head of private markets. The Fund is also on the cusp of another growth phase with employee numbers expected to jump from the current level of about 40 to 70 by 2011 as it ramps up its in-house capabilities and external investment “networks”.