by David Chaplin
The almost NZ$50 billion (A$46.7 billion) NZ Superannuation Fund has made several changes to its manager line-up and asset allocation over the last year including taking a $1.6 billion bond portfolio in-house. Northern Trust and BlackRock were the biggest losers.
According to the NZ Super annual report released last week (October 21), the fund shifted the $1.6 billion passive government sovereign bond holding from incumbent manager Northern Trust Asset Management to the internal portfolio completion team over the previous 12 months.
“Holding sovereign bonds internally enhances our liquidity profile, which means we have greater ability to buy or sell the investments in this portfolio in a timely manner, and with minimal transaction costs,” the report says.
“The move will also allow us to become more active in the repurchase agreement (repo) markets, where we had previously abstained as borrowing bonds from external investment managers produced operational complexity and performance disruptions. Building up our capacity to trade in these markets will also aid in our liquidity during market shocks.”
An NZ Super spokesperson said sovereign fixed income exposure would continue as an indexed strategy under the new management. Despite the change, Northern Trust “still manages about $6.35 billion for us across passive global equities, passive emerging markets and a multi-factor investment mandate, in addition to being our global custodian,” the spokesperson said.
However, the 2020 report reveals a substantial year-on-year realignment among the existing NZ Super roster of four passive mandates – which collectively account for the majority of the fund’s investments. As well as splitting up the indexed mandates for most managers into sub-categories, the 2020 figures show the fund has pared back the proportional (and nominal exposures) to BlackRock, Northern Trust and State Street over the year while doubling the AQR multi-factor global equities portfolio to $2 billion.
Year-on-year, BlackRock has seen the largest cut-back with its collective mandates representing just 9.5 per cent of the NZS portfolio in 2020, almost half the proportion recorded last year. But BlackRock is queued for a top-up via a new multi-factor mandate yet to be implemented as at June 30 this year. NZ Super says the fund has “increased the amount of risk allocated to factors” from the previous 10 per cent of the total portfolio to 20 per cent with a new manager slated to share the load.
As reported this February, NZ Super appointed Dutch firm Robeco (among three new managers) to run a multi-factor portfolio that was not in place as at balance date. The fund adopted the multi-factor approach over the last 12 months after previously running a two-factor (value and low volatility) strategy through AQR and Northern Trust.
Apart from the multi-factor shake-up, the NZS made a few other manager changes during the year including two recent hires.
“Following a refresh of the global macro opportunity definition, we appointed two new managers to join our existing manager, Bridgewater Associates,” the report says. “We committed US$100 million to Two Sigma (appointed June 2020), and US$50 million to Citadel LLC (appointed July 2020), both US based.”
In February, the fund also appointed Hillwood and The Carlyle Group to manage US real estate and diversified insurance strategies, respectively. At the same time, the NZS dropped value shop LSV Asset Management from a $460 million emerging markets equities mandate after concluding “the drivers of excess return in this space were no longer persuasive”.
In her final spin in the chair, Catherine Savage says in the report the NZ Super also completed its review this year of the reference portfolio – “the single biggest influence on Fund returns”.
She says: “The board selected its preferred ‘Reference Portfolio’ in April after a 10-month iterative process, engaging in every key decision along the way. We have chosen to retain a portfolio consisting of 75 per cent global equities, 5 per cent NZ equities and 20 per cent global bonds with 100% currency hedging applied to foreign assets.” She retires next March.
Matt Whineray, NZ Super’s chief executive, says 2020 has been a “turning point” for the fund, now in its 17th year of operation. “As the portfolio has grown and our investment strategies have broadened and increasingly been brought in-house, risk management has become more complex,” he says. “In 2020 we sought to further develop our risk management and control identification and assessment processes.”
The fund underperformed its reference portfolio by more than $920 million over the 12 months to June 30, returning 1.73 per cent. Since inception, however, the NZS is up about $7.8 billion after costs compared to the reference portfolio.
Over the 12-month period, NZ Super’s costs rose to $132 million ($109 million in 2019), divided among: ‘other’ expenses, $54 million; staff, $40 million; investment manager fees, $35 million; and, performance fees, $2.3 million. As a proportion of funds under management (of about $44 million as at June 30), costs equated to about 0.3 per cent, rising slightly from 0.27 per cent last year. It had 132 staff members earning more than $100,000 in the latest annual period compared with 121 last year.
– Investment News NZ