New Zealand’s A$32 billion billion Accident Compensation Commission (ACC) fund is looking to bolster its global shares team with in-house management now accounting for about 20 per cent of the asset class.
According to an ACC spokesperson, the fund plans to hire two more global equity analysts this year to join the duo of Zlatko Todorow and Sasha Srivastava who work with head of investments, Nicholas Bagnall, in running the approximately NZ$1.2 billon in-house international shares portfolio.
In 2010 the-now NZ$34 billion plus ACC fund – NZ’s largest – began managing some global shares in-house to eke out “superior risk-adjusted returns” at less cost, Bagnall said at the time.
The latest ACC annual report, released last week, shows the fund has almost NZ$6 billion invested in offshore shares.
As well as the in-house portfolio, ACC outsources international equities to seven external managers with the roster changed slightly during the latest fiscal period.
“Over the past year, ACC has terminated an existing global equity mandate with MFS, and appointed two firms – Arrowstreet and Harding Loevner – to manage new global equity mandates,” the spokesperson said.
In addition to the new appointments, the ACC fund lists CPH (now part of AllianceBernstein), Intermede, Marathon, Wells Capital and Orbis (via a pooled fund) as external offshore equity managers.
Global shares returned -5.6 per cent for the ACC over the 12 months to June 30 this year, the annual report shows, versus a benchmark -8 per cent. Both the in-house international equities portfolio and all external managers outperformed their respective benchmarks, the report says.
Over the three-year period global shares returned 10.8 per cent per annum for ACC, 1 per cent above benchmark.
With the exception of its in-house local bond portfolio and international fixed income (managed by PIMCO), all ACC asset classes outperformed during the 12-month period, the annual report shows.
However, in the three years to end June the ACC’s global bonds and Australasian property/infrastructure portfolios underperformed their benchmarks by 0.9 per cent and 0.5 per cent respectively.
Overall, the ACC fund racked up a 10.4 per cent return in the 12 months to June beating its composite index of 9.7 per cent to maintain a 21-year unblemished record of benchmark outperformance.
After deducting investment management costs of $42.4 million (including fees paid to external fund managers and the remuneration of in-house investment staff), portfolio returns would be down 0.135 per cent on the latest annual result, according to the ACC annual report.
“ACC’s unusually strong investment performance over the past two decades may be partly explained by the fact that ACC’s internal management avoids many of the agency issues inherent in traditional models of funds management,” the report says.
Despite the performance accolades, the ACC report says future returns could be more difficult to sustain particularly with the reducing yield from NZ fixed income, which constitutes about a third of the total portfolio or $11.7 billion.
“The decline in New Zealand bond yields boosted our investment income over the past year, but it reduces the returns that we can anticipate from bonds in the future,” the ACC report says.
Consequently, the fund has upped its exposure to equities in its strategic asset allocation as per an amended “fair trade-off between aggregate portfolio risk and aggregate portfolio return”, the spokesperson said.
“The extent by which this change in risk/return preference will flow through to changes in our allocation between asset classes depends in part on our return expectations and risk estimates for each asset class, which we formally review twice a year,” the spokesperson said. “However, on ‘all else being equal’ basis, the change would have been expected to increase our aggregate equity weight by slightly less than 5 per cent of ACC’s total investment portfolio. ACC has already partly implemented this change in risk/return preference.”
ACC manages most of its Australasian equities in-house with just two external mandates to Australian small cap specialist, Paradice, and an allocation to resource shares through Independent Asset Management.
Additionally, the ACC fund has about $1.5 billion investment in private equity, venture funds, property and infrastructure via 12 different external entities. While most of these alternative investments were past maturity date the “ACC continues to hold its investment in these funds, but would not anticipate contributing additional capital”, according to the spokesperson.
“[During the year] we have made new investments in Australian private equity funds managed by Quadrant and RMB, and have committed capital to a bridging fund run by Pencarrow (but this is not a new PE manager, as we already held an investment in a Pencarrow fund),” the spokesperson said.
The ACC fund intends to hire another private investments specialist in addition to the two global equity analysts, which would bring the total investment staff close to 60.
“The funds management team consists of 29 investment professionals (portfolio managers, analysts, strategists, dealers, etc) plus one PA,” the spokesperson said. “We are also supported by an ‘investment office’ of 24 back and middle office employees (including functions such as compliance, custody, performance, investment accounting, and investment systems support).”
