The NZ$25.5 billion NZSuper (AUS$23.6 billion) is intended to reduce the tax burden on future taxpayers to fund New Zealand Superannuation, the retirement benefit paid to eligible citizens by the Federal Government. The government is not scheduled to make withdrawals from it until 2029-30 and the fund will peak about the same time today’s four year olds begin to claim benefits in 2080. This long time frame gives NZ super’s team of 40 investment professionals an enviably long timeframe to invest.
David Rae, head of investment analysis at the fund, says it is great to be a truly long term investor with the ability to invest anywhere in the world, within any asset class allocations and without the ‘side issues’ of member liquidity or political interference to distract them.
“We see value in thematic investing because these long-run, slow burn changes in economies and markets take time to play out. We have an advantage in that. Most investors are just not capable of pursuing strategies that might take half a decade or more to bear fruit” he says.
Illustrating this point, Rae references his team’s decision to directly invest in and manage a group of New Zealand dairies, several timber plantations and a residential building construction in India; it’s taking the notion of thematic investing, and actually implementing it with relatively few constraints.
There are also examples of where the fund has invested akin to a private equity player: buying and repackaging assets, shaking up management, getting the customer service right and “creating a brand out of nothing” to realise substantial end profits.
“In conjunction with another investor, Infratil, we bought the downstream oil assets of Shell, which includes anything that’s not exploration assets, so the pipelines that transport oil to market, the service stations and other front-end assets. We’ve since rebranded the business,
Z energy, creating a local NZ company and that’s been an enormous success story, which people here in NZ can also identify with.”
Since its acquisition in 2010 the fund has sold down its share of Z Energy, which represented 2.8 per cent of their portfolio at one time, via a partial NZ and Australian IPO last June, collecting NZ$420 million for 30 per cent of its original stake in the company, while retaining a further 20 per cent.
But, he cautions, while being nimble is his team’s top priority in terms of investing, it’s paired with discipline. “You can be nimble and random, but that’s destructive. Nimble and disciplined is where it pays off.”
The pay off
On the eve of its tenth birthday the fund’s returns to date are 9.55 per cent p.a. pre-NZ tax and post-fees over ten years, 17.04 per cent p.a. over five years and 18.10 per cent p.a. over the last 12 months.
The fund’s returns are post offshore tax but pre-NZ tax, because unlike most other sovereign wealth funds, it pays tax in its home jurisdiction and these Crown payments are therefore a net outflow, given the suspension of capital contributions. That said, it estimates it returned about 19.8 per cent post costs and NZ-tax in 2013, versus an absolute return of 26.07 per cent based on an effective NZ tax rate of 24 per cent. In Australia, in the 10 years to June 2013 the average rate of return for large funds was 6 per cent year on year, after fees and Australian taxes, while over the preceding 12 months they recorded a strong 13.7 per cent off the back of global equity rallies.
No fixed allocations
The fund’s “really flexible investment framework” translates to a not-over-the-top 30 per cent allocation to what most of us would call ‘alternatives’ but with lower-thanmost allocations of 50 per cent in global equities, 15 per cent in bonds and 5 per cent in REITs. The 30 per cent in alternatives is roughly 5 per cent allocated in timber, 5 per cent in infrastructure, 5 per cent in New Zealand equities (which they ring fence from global equities due to their illiquidity) and the remainder split between insurance products such as catastrophe bonds, New Zealand farmland and hedge funds. The fund’s largest single strategy is its dynamic asset allocation.
“It’s the biggest part of our risk budget and the single biggest investment process we have. It means we can dial up and down currencies, bonds, equities and credit – all the big liquid asset classes. When equities are cheap we dial them up relative to cash. That’s what’s different about us, compared to those having a fixed allocation.”
Rae and his team have also decreased their private equity allocations, aiming to wind back their private equity real estate exposure to zero, but remain committed to their agricultural assets and insurance strategies which invest in re-insurance products for life settlements and catastrophe bonds, which together make up about one per cent of the entire fund. Currently the portfolio as a whole is more liquid than it has been in the past, because Rae and his team take the view that most markets are currently on the expensive side, making good buying opportunities few and far between.
“It’s a tough market to spot any value, liquid or illiquid. There’s not a hell of a lot out there, so we’ve been quiet, selling active strategies and going back into global equities and global bonds,” he says.
Bringing ESG front and centre
The fund is renowned globally for its leadership on Environmental, Social and Governance (ESG) issues. Since Rae took up the job the fund has introduced ESG valuations and processes to the front-end of the investment process, preventing it from being the “door stop” his investment team has to overcome at the back end. He says while some were led “kicking and screaming” to draw up their own list of potential ESG risks and principles, specific to asset classes, but the approach has resulted in greater ownership of managing risks around issues such as labour supply chains, on-farm occupational health and safety measures, executive remuneration and the appropriateness of company boards.
“We’re trying hard to bring ESG issues into our models where we can, and are putting more effort into corporate governance in companies – we think we’re big enough to make a difference. We’re behind promoting best practice, by engaging with companies.”
The fund’s approach to facilitating change has traditionally been via engaging with companies and in getting together with their peers in NZ to become a representative voice, if and where it’s called for. In the past, they did sack a company board engaged in “empire building” Rae admits, “but that was at the extreme end of the spectrum,” he says.
It’s with this kind of candour, and their novel approach to investing that’s seen NZ Super attract global attention for being a leader in long term strategic investing, alongside the likes of CalPERS, Denmark’s ATP and the Ontario Teachers’ Pension Plan.