NZ Super looks to factors, carbon

The NZ$33 billion ($22 billion) New Zealand Super is looking to increase its exposure to equity factors while also implementing the next phase of its climate strategy, which includes decarbonising its existing equity factor mandates.

About three-quarters of the fund’s portfolio is passively managed and the use of factor strategies is aimed at getting more out of the passive portfolio.

Specifically, NZ Super is looking to appoint an additional manager this year with a focus on multi-factor strategies.

A spokesperson says: “All mandates with existing (and future) equity factor access points are flexible, and can be sized up or down as required by our views on opportunity attractiveness, assessed several times a year.”

The fund has existing factor mandates with AQR and Northern Trust, both for low volatility and value.

NZ Super moved its global passive equities portfolio to low carbon last yearand now climate change-related exclusions have been implemented in its externally managed emerging-markets mandates.

The investment committee also recently approved a framework for investment professionals to incorporate climate-change considerations into valuations. The next move is to focus on decarbonising the existing equity factor mandates.

The fund is working on releasing a carbon footprint for the portfolio for the financial year just ended.

NZ Super chief economist Mike Frith says the fund is strongly weighted towards growth assets, but the overall use of active risk remains comparatively low.

“This reflects our view that many assets are fairly valued,” Frith says. “It reflects the low use of risk by those strategies that respond to changes in the market environment, like the strategic tilting program.”

The strategic tilting program is one of three value-adding activities in which the fund engages. The other two are capturing active returns and portfolio completion.

The fund has made a number of other new investments in the last six months.

In October last year, it purchased a stake in Australian beef stud Palgrove, which was the fund’s first offshore investment under its rural land strategy. It now has 33 farms, worth $340 million, in its rural land portfolio.

NZ Super also increased its allocation to natural catastrophe bonds, managed by Leadenhall. The mandate is managed as a separate account to give the fund flexibility to respond to changing market conditions. It typically changes several times annually.

Earlier this year, NZ Super, alongside CDPQ Infra – an infrastructure-dedicated subsidiary of $238 billion Caisse de dépôt et placement du Québec – submitted an unsolicited proposal to the NZ Government to develop, construct, own and operate the Auckland Light Rail project on a commercial basis.

CDPQ Infra is responsible for developing, building and operating a 67km light rail network that is under construction in Montreal. About 2 per cent of NZ Super’s portfolio is in infrastructure.

As at June 2018, the fund’s other asset allocations include global equities (66 per cent), fixed income (10 per cent), timber (5 per cent), private equity (5 per cent), NZ equities (4 per cent), other private markets (3 per cent), property (2 per cent) other public markets (2 per cent).

“We are well positioned to benefit from the underlying economic outlook,” Frith says. “But we expect more normal performance from the fund in future, rather than the very high returns we have had.”

The fund returned 13.2 per cent in the year to May 2018. The reference portfolio returned 10.7 per cent with the active return from investments adding another 2.5 per cent.

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