It looks at the beta risks  in the portfolio and expected returns. It  also manages the more dynamic aspects  of asset allocation, such as “portfolio  completion” and “strategic tilting”.  These are relatively new activities for  the fund and allow it to more accurately  identify its risk exposures, Orr says.  The investments team, managed  by Matt Whineray, then looks for  opportunities that it believes can  improve the performance of the reference  portfolio. This team is comprised of  experts in various asset classes such as  timber, private equity and property.  It also has an analytics team, led by  Dave Ray, which creates and operates an  investment opportunity “heat map”.  “This breaks down investments  to underlying risks, and is really a  breakdown between the asset allocation  and investments team,” Orr says.  The teams work in concert. Asset  allocation staff work with the analytics  and investments departments to analyse  the underlying risks of investments and  then decide on exposures. They are  dependent on each other’s teamwork:  one division cannot operate without the  other.  “It is very obvious when you are  adding value in this type of portfolio  management,” Orr says.

“You are  rewarded for additional risk. Otherwise,  what’s the point?”  Asset class agnostics  The use of reference and active  portfolios challenges the conventions  of “bucket-filling” across asset classes  because investment staff do not operate  in silos. They are looking for the right  risks instead of assets. This approach,  which deconstructs asset class ranges, is  powerful but also difficult, Orr says.  It makes NZ Super agnostic to the  concept of an asset class as the access  point to an investment exposure.  “The form an investment takes – it  could be private equity or timber – is one  of the last questions we ask,” Orr says.  “The investment framework starts  by understanding which risks we could  bring into the portfolio – whether it be,  for example, duration or liquidity – and  then how we are going to be rewarded  for that.  “The emphasis is often on  assessments of manager skill. That’s a  nebulous concept and it is difficult to  assess. We believe if it is a fertile area  then even an average manager can do  well.”  David Iverson, head of portfolio  design at the fund, says any decision to  move away from the reference portfolio  becomes an active decision and must be  supplemented with a corresponding sale  in the reference portfolio.  Iverson explains: Any private equity  commitment requires that global equities  be fully sold and that 10 per cent of the  global bonds exposure be sold short  within the reference portfolio.