According to Stephen Gilmore, chief investment officer at the (NZD)$50 billion NZ Super Fund, getting the team together for its quinquennial reference portfolio review is a major event.

“It’s really almost like an all-hands-on-deck’ process,” the CIO said.

Speaking at the Conexus Financial Fiduciary Investors Symposium 2020 Digital Conference with editor Amanda White, Gilmore revealed how crucial the review process is to the investment governance of the fund.

“It’s probably the most important investment decision we make because it sets out risk appetite and it helps us get the right perspective,” he said. “It’s an equilibrium concept, and we’re looking out over the very long term – it can be 30 to 40 years.”

Watch a brief excerpt of the interview with Gilmore below.


For Gilmore, the core benefit of reference portfolios is that they ground the fund’s investment governance and facilitate accountability of the investment committee. NZ Super’s reference portfolio is currently 75 per cent global equities, five per cent NZ equities and 20 per cent NZ bonds.

“The idea of course is that we construct this simple transparent portfolio that will achieve our mandate, and we can use that as a device for expressing the risk appetite of the organisation and we can stress test that, but also it’s really important from an accountability perspective because as an organisation we want to do better than that,” he said.

Gilmore explained the parameters NZ Super uses to create and review the portfolio as being relatively straightforward.

“I try to create a liquid or simple transparent, publicly accessible portfolio that actually meets our mandate [while] maximising our return without undue risk,” he said. “We spend a considerable period coming into the reference portfolio review thinking about what the eligible markets might be, what the respective returns from various investments might be and thinking about the relationship between those instruments.”

The reality, however, is often far from simple, especially when the reference portfolio is weighted against the uncertainty of 2020. NZ Super’s most recent five-year reference portfolio review was completed in June, and while the CIO said the reference portfolio looks relatively unchanged, he added there was “a lot of thinking and detailed discussion” behind its construction.

“Some of those discussions were… I won’t say fraught, but I would say challenging because we were sitting in an environment that had Covid-shock and we were trying not to think about the very short term, we’re trying to think about the very long term,” he said.

Rate headaches and hedging bets

Gilmore said the biggest change in the assumptions used in the reference portfolio this year related to rates.

“If we think of the last five or ten years the one thing we have really underestimated, like many others, is how low rates could really go and how long they would stay low,” he said. “Our assumptions around real interest rates came down, [we’re] looking for real interest rates globally to be around half a per cent over the very long term.”

The investment committee came to the conclusion that scant change was required on the equity side of the reference portfolio, but the issue of hedging against currency risk did cause some consternation.

Like Australia, there has also historically been a benefit to carefully managed currency hedging, Gilmore explained. But assessing it in 2020 meant looking through a prism that included both increased uncertainty and unprecedented interest rate levels.

“There has been a currency risk premia that has been available since the time that the two currencies were floated, and we thought quite a lot about whether that currency risk premia would still persist in a world where rates are lower – particularly at the time when we were doing it, where it was effectively a case of rates being zero in most places we were looking at,” he said. “We eventually came away thinking that there would continue to be a currency risk premia but it would be a bit lower.”

Contention and collaboration

The CIO revealed that the decision to fully hedge the reference portfolio involved “intensive debate”, which the investment committee struggled to resolve. In an rare turn of events, they took the issue to the board and asked for their input.

“This one was unusual because we were evenly split over what we should do,” he recalled. “Ordinarily we would go to the board with a recommendation, [while] also expressing other alternatives. In this particular case we really weren’t sure, so we presented that to the board. It was quite novel.”

In the end – and after “quite extensive” debate at the board level – Gilmore says the team decided stay the course and maintain the existing hedge ratio. The consultation between investment committee and board, however, was a positive experience for both parties.

“In the end we decided that it didn’t really matter that much in the sense that we were only talking fairly marginal differences in terms of the hedge ration we would have chosen,” he said. “But it was fascinating that we actually decided this time to present the nuance of the discussion we had with the internal investment committee and discuss that with the board. I think the board found that quite helpful.”

You can see the full interview on the Fiduciary Investors Symposium digital hub.

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