Forcing New Zealand Government funds to sell down holdings in collective investment vehicles (CIVs) to avoid controversial companies could “result in potentially material costs”, according to a NZ Treasury analysis published last week.
Published under Official Information Act (OIA) rules, the April 2016 Treasury report on the Accident Compensation Commission (ACC) and New Zealand Superannuation Fund (NZS) “responsible investment frameworks” says “mandatory divestment policies” for CIV exposures might have serious performance side-effects.
“If ACC and NZSF were prevented from investing in CIVs (where Direct Exclusion Lists cannot be enforced), then they would lose full access to the available pool of fund managers,” the Treasury study says.
“This would include losing access to some of those fund managers that deliver in the top quartile of returns. Or, as in the case of global macro strategy managers, there may be no alternative ways of accessing certain investment strategies. Over time this would result in an opportunity cost to ACC and NZSF with real implications on the performance of their portfolios.”
The Treasury report was prompted by an earlier OIA request on the ACC’s exposure to cluster munitions via an Orbis Investment Management fund.
Treasury says following an internal investigation, the ACC determined the Orbis holding in Lockheed Martin, which is involved in the manufacture of cluster munitions, did not breach its ethical investment policy because:
- The holding in Lockheed Martin was indirect and ACC was unaware of the investment until after it had been acquired by Orbis;
- The purchase was done on the secondary market;
- The holding represented only 0.3% of the Orbis fund’s overall portfolio and has since been divested; and
- ACC has not invested in any CIV with the intention or knowledge that monies would be used in the development or production of cluster munitions.
While both the NZS and ACC incur a “real cost” implementing their existing (and similar) responsible investment policies, the Treasury report says selling down CIVs exposed to an “excluded entity” would trigger exit costs, value leakage as well as opportunity costs.
“The financial implications of such a stance could be much more material to the overall fund in question,” the Treasury study says.
Meanwhile, the December 12 ministerial ‘letter of expectation’ to the NZS – published last week – includes a few new items in addition to the annual boilerplate demands.
For example, the letter from the-then Finance Minister (now Prime Minister), Bill English, calls on the NZS to meet with Treasury “in the New year” to discuss the impact of “strategic issues, risks and influences on entities’ financial performance”.
In reply, NZS Guardians chair, Catherine Savage, wrote: “… we would like to understand what is intended by your expectation regarding Ministerial consultation over any planned strategic changes that would materially alter the risk profile of the Fund.”
It is understood, the Treasury/NZS meeting has yet to be scheduled.
Furthermore, English says NZS should engage with the government over policy decisions affecting it “particularly when it comes to decisions around fiscal management and what those decisions may mean in terms of contributions to the Fund”.
“However, I ask you to refrain from using public forums to comment on decisions that are ultimately the right and responsibility of the Crown,” he says in the letter.
– David Chaplin, Investment News NZ