Kiwi sovereign fund NZ Super has returned 14.9 per cent in the 2024 financial year, lifting the value of the fund by NZ$11.2 billion to NZ$76.6 billion ($70.6 billion), driven by strong global equities.
However, the performance was just under the NZ Super’s Reference Portfolio return, which gained 15.1 per cent over the financial year.
Around half of NZ Super is invested passively, which means the Reference Portfolio is a fundamental part of the Actual Portfolio and the passive benchmark. It currently consists of 80 per cent equities and 20 per cent fixed income.
“We’re trying to keep the funds risk relatively stable when we make an active investment, so if we invest in timber and forest, for example, we’re going to sell down an appropriate amount of equities and bonds to keep the total fund risk the same across that transaction,” the fund’s acting chief investment officer Alex Bacchus tells Investment Magazine. Bacchus has been overseeing the team since Stephen Gilmore left NZ Super to steer the US$502.9 billion ($754.3 billion) CalPERS as its CIO in July.
“With equities returning nearly 20 per cent over the financial year, that makes it a bit more of a headwind when comparing our active strategies against that,” Bacchus says.
There were still pockets of gains in active strategies such as in the fund’s multi-factor equities portfolios and data centre investments, said Bacchus.
But the strategic tilting programme has had a rare negative return due to equity and currency tilting, said Bacchus, who actually led the initiative from 2014 before he became acting CIO.
Strategic tilting has been one of NZ Super’s top-performing programmes since it was introduced in 2009. According to the fund’s 2022/23 report, it contributed NZ$935 million ($862 million) in value-add during the year and approximately NZ$4.6 billion ($4.2 billion) during its lifetime.
“Strategic tilting is one of those active investment strategies that’s designed around the long horizon, so we think we can look through some of the short-term volatility in the market and focus on the long term and make money because of that,” Bacchus says.
NZ Super asset allocation as at 30 June 2024
| Global equities | 44% |
| Debt securities | 21% |
| Alternatives | 7% |
| Infrastructure | 5% |
| Rural and timber | 5% |
| Property | 5% |
| NZ Equities | 4% |
| Private equity | 3% |
| Global equities – EM | 2% |
| Other (Cash and miscellaneous) | 4% |
Source: NZ Super
Compared to asset allocation at the end of FY23, NZ Super increased exposure to global equities and property, but has the biggest reduction (3 per cent) in both debt securities and alternatives.
“Debt exposures have reduced primarily due to a reduction in exposures through our internal tactical credit mandate. This follows a pullback in credit spreads,” Bacchus said.
“Alternative exposures have reduced primarily due to us exiting merger arbitrage strategies.”
The fund’s Australian equivalent, the $225 billion Future Fund, returned 9.1 per cent for the same period. It has had a lower listed equities weighting in FY24 compared to most years.
According to a report by Global SWF, NZ Super has been the best-performing sovereign wealth fund over the past decade (FY14-FY23), with an average return of 10.8 per cent a year. But the fund is already looking out to the next ten years as its AUM is projected to double during that period.
Manager of the fund, the Guardians of New Zealand Superannuation, undergoes a five-yearly review and it was again conducted by Willis Towers Watson (WTW) in 2024. Results were tabled today in New Zealand Parliament by the Minister of Finance, Nicola Willis.
WTW said NZ Super’s ballooning fund size creates more organisational complexities and the challenge for the Guardians would be “to maintain effective combinations within and across teams and across providers”.
One of the seven recommendations outlined in the report was for the Guardians to “develop a set of complexity principles and strategies”. This includes putting sufficient focus on “business-beyond-usual” activities in the mix of time and strategy.
Other recommendations include more deeply integrating systemic risks into the total portfolio design, in-housing more private market investment management, and ensuring stronger leadership succession planning.
The recommendations were aimed at a fund level, but Bacchus said NZ Super’s investment team is set up for growth.
“We already have a number of investment teams that can quite easily scale their strategies and approach to a bigger size,” he said.
NZ Super CEO Jo Townsend said in a statement that while the findings were mostly encouraging, the value of the report lies in outlining how the fund can improve from here.
“How best to consider impact when we assess potential investments, how to maintain our culture as the organisation scales up, and mitigating the many systemic risks facing all investors are just some of the issues we will need to manage if we are to maintain and improve upon our record to date,” Townsend said.
Alex Bacchus will speak at the upcoming Investment Magazine Fiduciary Investors Symposium in Healesville, Victoria. Register for the event here.
