This September, the New Zealand Superannuation Fund turns five. DAVID CHAPLIN finds out if it will be a happy birthday for the country’s largest investment fund. The New Zealand Superannuation Fund.
(NZS) is not perfect but it’s pretty close to it, according to a recent survey of sovereign wealth funds conducted by the Washington DC-based Peterson Institute.
In the study – which reviewed fund governance and transparency factors – NZS scored 24 out of a possible 25 putting it in the top position just ahead of the Norway Government Pension Fund (23) and the Timor-Leste Petroleum Fund (21.75).
(Australia’s Future Fund managed only 17 out of 25 in the Peterson Institute scoreboard, ranking just outside the top five.) The Peterson result was a nice little pat on the back for the NZS and a vindication of its open-door policy – a policy that has at times left the Fund vulnerable to attack. The country’s Green Party, for example, has taken a number of pot-shots at NZS, lambasting its holdings in companies linked to the nuclear, munitions and tobacco industries.
Such political pressure has met with some success too. Soon after the Green’s lambasted NZS for owning shares in tobacco firms last June, Prime Minister Helen Clark was quoted as saying: “Personally I don’t like seeing superannuation fund money going to tobacco companies. I don’t think that’s ethical at all.”
By October 2007 NZS had promised to divest all its NZ$37.6 million worth of tobacco stocks. The Fund’s commitment to monthly performance reporting has also left it open to media fear-mongering and public over-reaction. For instance, after NZS revealed in March 2008 that it was down almost 6 per cent in the first quarter, a recently-formed lobby group called Exposing Unacceptable Financial Activities (EUFA) made a creative link with that paper loss and the rash of finance company failures in the country. “We are fearful,” an EUFA release said, “of what impact this will have on the country when the Nations retirement funds are swallowed up the same way that we have seen individual investors money disappear over the last year.”
Quite clearly some of the details of the NZS mission have yet to embed themselves in the public consciousness. With no draw-down legally possible until 2020 and a government-guaranteed annual cashflow of about $2 billion the Fund is in a good position to handle any short-term volatility.
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”.
According to the NZS 2008/9 ‘Statement of intent’ released late in June, the Fund has a few immediate objectives such as “exploring the benefits of increased protection against the effects of inflation, lengthening the duration of our fixed income exposures, and assessing how we can best benefit from the differential between New Zealand and global interest rates”.
In the spirit of transparency so highly-rated by the Peterson Institute, both the ‘Statement of intent’ and the ‘Revised investment policies’, released early July, are now available on the NZS website. Go read them.