Changing liquidity premiums and a long time horizon allow the NZ$29 billion sovereign wealth fund, New Zealand Super Fund, to access new investment opportunities.

Liquidity premiums are appearing in niches because of the changing activities of the banking sector, essentially in areas where investment banks, brokers and hedge funds were actively involved pre-GFC.

“One of our advantages as an investor is our tolerance for illiquidity. We don’t have any outflow until 2030 at the earliest which means we have a great deal of certainty in our liquidity situation that enables us to take on illiquid assets,” David Rae, head of investment analysis at New Zealand Super Fund, said at the Frontier Advisor Conference in Melbourne on Tuesday.

The liquidity benefits have changed in the past few years, particularly as a result of quantitative easing. Rae said the liquidity advantage used to be more macro, in the sense it was about the difference between public markets and private markets, but where liquidity premiums and returns are starting to appear is now to do with market micro structure effects.

For example, fixed income markets have experienced a big reduction of involvement from investment banks and other institutions, causing concerns about the level of liquidity in the system. While Rae is also concerned about the fixed income market, he has identified an opportunity for New Zealand Super Fund to provide liquidity to the market and get paid a liquidity premium.

“We are seeing liquidity premiums coming out of parts the market as the result of a structural fix, particularly coming out of the changes to the banking system. This has created a lot of liquidity opportunities for us, but it is much more granular,” Rae said.

In a similar vein to AustralianSuper and the Future Fund, New Zealand Super Fund’s overall investment approach is not based on strategic asset allocations but instead on a reference portfolio model.

“The beauty of having the absence of asset allocation plus an upward listed benchmark is that’s an extremely powerful way of us asking, ‘is it worth it’?”

The philosophy Rae follows is simple. He weighs his decisions by asking if the New Zealand Super Fund was to operate on $3 million would they invest in it.