The NZ$30 billion New Zealand Superannuation Fund’s actual and benchmark portfolios are tracking closer than ever before, according to chief investment officer, Matt Whineray. The sovereign fund believes most assets are fully valued and it has pulled back its active risk compared to benchmark.
NZ Super launched the reference portfolio in 2009 to measure performance relative to an entirely passive implementation of its asset allocation strategy. It acts as a bespoke benchmark. Internal managers have to have a high degree of confidence in their views in order to deviate from the reference portfolio.
“There’s not a great deal of opportunity out there,” Whineray said. “In fact, the distance between our actual portfolio and the reference portfolio is lower than it’s ever been.”
In its five-year reference portfolio review, published last week, NZ Super says the “actual portfolio can deviate substantially from, and is more dynamic in nature than, the allocations in the reference portfolio”.
“The decisions to deviate from the reference portfolio are delegated to the fund’s management, subject to a clear set of risk limits and guidelines,” the review says.
Despite the current risk-averse approach relative to its passive benchmark, NZ Super review confirms the fund will stick with its reasonably aggressive asset allocation for the reference portfolio, split 80/20 between growth and income assets.
However, following the review the reference portfolio has been simplified with the removal of its explicit 5 per cent allocation to global real estate investment trusts (REITs). In place of the REITs exposure, NZ Super has added a new 10 per cent allocation to emerging markets equities (while lowering the broader global shares portion from 70 per cent to 65 per cent).
Whineray said the reference portfolio would still have a 4 per cent exposure to global REITs via the broader equities benchmark. The NZ shares exposure in the reference portfolio remains at 5 per cent. At the same time, NZ Super has swapped benchmarks for the reference portfolio fixed income component, opting for the off-the-shelf Barclays Capital Global Aggregate Index in place of an earlier customised version.
Whineray said the change has “tidied up” the fixed income exposure with inflation-linked bonds and some high-yield credit removed from the portfolio.
Overall, he said the new reference portfolio “should be slightly more efficient to implement”.
The fund has already amended its actual portfolio in line with the new reference benchmarks, Whineray said.
He said the changes have been implemented through its three passive managers State Street, Northern Trust and BlackRock.
To date, NZ Super has outperformed the reference portfolio by 1.2 per cent since inception (in 2003) also beating its simpler benchmark, of NZ 90-day Treasury bills plus 2.5 per cent, by more than 3 per cent.
In nominal terms, NZ Super has returned 10.3 per cent annually since 2003. However, the reference portfolio review lowered projected long-term returns from the previous 8.5 per cent (set in 2010) to 7.7 per cent.
The fall in predicted long-term returns was due entirely to a 1 per cent drop in the ‘risk free’ rate to 5 per cent, in light of declining global interest rates.
Whineray said over the last five years the reference portfolio outperformed expectations returning about 14 per cent annually compared to the predicted 8.5 per cent.
“Clearly, it’s been a good time to be in markets,” he said. “But that can’t be expected to continue forever.”
In spite of the forecast drop in nominal returns for the reference portfolio, the NZ Super review says it should outperform the ‘risk free’ rate by 2.7 per cent – an increase of 0.2 per cent compared to five years ago.
“The higher expectation of excess returns after costs results from the removal of some rounding in 2010 (0.09 per cent), slightly higher exposure to riskier emerging markets (0.06 per cent), and a slightly lower estimate of the costs of running the reference portfolio (0.05 per cent).
According to the NZS, the forecast cost reduction “results from a general movement down in passive management fees and our expectation that this will be maintained”.
“Passive management will continue to get cheaper,” Whineray said, largely due to the increased popularity of index investing globally.
– David Chaplin, Investment News NZ.
NZ Super reduces active risk: 5-year benchmark review