No one who works at New Zealand Super has a business card that has an asset class attached to it. This simple representation speaks volumes to the investment approach taken by the fund.
One could work for the strategy team or the investment analysis team, but the investment structure by which NZ Super invests, such as equities, is seen as a legal structure, an access point, not a predetermined allocation, desire or need. So having staff organised according to those lines makes little sense.
“Everyone is working on or for the same fund. It is very hard to implement and you have to be very disciplined,” chief executive of the NZ$24 billion ($19 billion)NZ Super, Adrian Orr, explains.
“It has changed how we recruit, and the culture, everyone has to understand what each other does as much as the whole part and what they do as individuals. You have to be very open-minded and encouraging to understand where everyone’s coming from.”
The reference portfolio and reality
In a similar way to how the Canadian Pension Plan Investment Board approaches investments, NZ Super has a reference portfolio, which is the low-cost growth-oriented portfolio that could achieve the fund’s objectives.
“The reference fund is deliberately chosen as passive, the listed cheapest access point to the risk we want to achieve our goals. It’s not a strategic asset allocation in that sense. The actual portfolio can be and is very different to that – but at our own peril,” Orr says. “We are judged on the total return and value add.”
In this context active investment is viewed as anywhere the asset allocation differs from the reference portfolio, for example, even adding private equity to strategic asset allocation is an active decision.
It also provides a clear benchmark to assess the value added as an active manager, something NZ Super does through dynamic asset allocation, investment strategies (such as timber, private equity and infrastructure) and treasury management (such as foreign exchange and liquidity management).
The asset allocation of the reference portfolio is really simple: 70 per cent in global equities; 20 per cent fixed interest; 5 per cent global listed property; and 5 per cent New Zealand equities.
In reality the portfolio looks quite different to that and at the end of January 2013 it had 61 per cent in global equities, 9 per cent in fixed income, 8 per cent in infrastructure, 6 per cent in timber, 6 per cent in property, 5 per cent in New Zealand equities, 2 per cent in other private markets, 2 per cent in private equity and 1 per cent in rural farmland.
The access point, or asset structure, is the last thing to be considered.
Orr says there are three lenses to look through the portfolio: asset class, risk factors such as market, credit, liquidity, duration, price/asset, and an economic lens such as exposure to growth or inflation. NZ Super continuously cross-checks all of these, taking the attention off the asset class lens, which Orr says is useful but is just the legal form within which those investments are bundled.
Playing to advantage
NZ Super doesn’t change the strategic asset allocation every couple of years, because it doesn’t have one.
“How we choose to actively invest through dynamic asset allocation or active strategies is done through a stable consistent framework: we look at what are our advantages and play to them,” he says. “We primarily invest in price/valuation gaps where we are confident that gap truly exists. We are more contrarian in our investing than trend or momentum driven. We were long equities in March 2009 when the natural position was the foetal position.”
In recent years there has been quite a lot of active risk in the dynamic asset allocation.
The fund strategically tilts underweight or overweight across major asset classes, equities, fixed income, property, credit and has been heavily tilted towards growth since March 2009. It has been long equities and short fixed income plus increasingly long the US dollar, where it has been tradition to be 100-per-cent hedged to the New Zealand dollar.
“This was done on the best estimates of valuation gaps,” he says.
Rankings, relationships and risk management
The process is in constant evolution. The fund recently introduced a new ranking system so that every investment opportunity can now be ranked on consistent financial attractiveness and confidence factors. This has resulted in the fund managing more internally, a reorganisation of the investment teams and an impact on costs – which, net of performance-fees expenses, remain flat at 0.45 per cent of funds under management – and it has changed the dynamic of its external relationships to include more flexibility.
About 45 per cent of the fund’s exposures are through derivatives, and the treasury, asset tilting, investment analysis and asset allocation are all done in house. It has also recently established a New Zealand active-listed-equities desk, and the internal team also conducts external manager-search activities.
The $22-billion fund has about 30 external mandates, which include private equity and multi-strategy hedge funds.
“We are pushing very hard on external relationships,” he says. “We are narrowing those down, we have to understand the opportunity set they’re looking at. We don’t believe in skill alone but have to understand the opportunity set and then decide whether to manage that inhouse or externally.”
The internal team has grown from 17 to 90 in six years, decreasing the fund’s cost base and increasing the range of internal activities. But Orr says it doesn’t have aspirations around the team size.
“We do want to look at the scalebale bits and how to make the ships go faster,” he says.
Next for the fund is an increased focus on risk management and the development and integration of investment themes, which it has identified as emerging markets, resource sustainability and evolving demand patterns.
One of the first actions is to look at how responsible investment can be embedded within investments rather than being learned outside the investment decision-making process.
“We want to look at ESG up front as part of the investment decisions and the expected return in terms of sustainablility.”
NZ Super has exceeded both its predetermined measures of performance since inception, outperforming the New Zealand treasury bill by 3.28 per cent and the reference portfolio by 0.74 per cent.