Low returns in equities drag NZ Super performance

Chief executive Adrian Orr says the NZ$30.1bn fund, which allocates about 5 percent of its portfolio to private equity,needs to “work harder to find attractive investment opportunities” in the current slow growth environment.

The New Zealand Superannuation Fund reported a dip in annual returns due to weaker results from its global equities portfolio, but a strong performance by its infrastructure and timber investments helped to offset some of those losses.

According to its financial report for the year to June 2016, the fund saw a 1.89 percent return before tax and after costs, plunging from a 14.6 return in the previous year.

The fund, which has invested in private equity since 2005, grew its overall portfolio size, from NZ$29.5 billion ($22 billion; €19 billion) in June 2015 to NZ$30.1 billion this year.

On a monthly basis, in July and August 2016, outside the reporting period, the fund posted strong returns of 3.7 percent and 1.2 percent, respectively, compared with a return of -0.7 percent in June 2016.

Chairwoman of NZ Super Catherine Savage said in a statement that the overall result was robust given the low growth, volatile environment. Global equity markets experienced negative returns over the year, with the MSCI developed markets and emerging markets indices returning a combined -1.88 percent.

In the same statement, chief executive Adrian Orr noted that the global investment environment was challenging, with “overall investment returns likely to be volatile and on a low trajectory for some time”.

He added: “There is an abundance of capital looking for investment opportunities, and asset valuations are therefore fully priced. We are having to work harder to find attractive investment opportunities.”

The Auckland-based fund did, however, outperform its reference portfolio benchmark – a low-cost reference portfolio used as a yardstick to measure value-add in its active investments – by 0.52 percent or NZ$155 million during the year, due mainly to strong performance in its timber and infrastructure investments. According to a statement, the firm’s 42 percent stake in forestry business Kaingaroa Timberlands increased in value, from NZ$82 million to NZ$1.49 billion. And in infrastructure, NZ Super, property firm Ngai Tahu, and asset management firm New Ground Capital invested $113 million late last year in new housing development at Hobsonville Point in Auckland, its first foray in the local housing market which will see 200 new homes built by 2018.

NZ Super’s asset allocation remains largely unchanged from the previous year. Out of NZ Super’s overall portfolio, global equities gets the largest allocation at 67 percent, followed by fixed income at 11 percent, timber at 6 percent, private equity at 5 percent, and NZ equities at 4 percent. Infrastructure, public and private markets, as well as rural farmland receive a combined 9 percent.

Nearly half of the fund’s investments are in North America (45 percent), Europe at 20 percent, New Zealand and Australia take up 15 percent, Asia receives 17 percent, while South America and Africa get 2 percent and 1 percent, respectively.

The fund has committed capital to several funds across the region, including KKR’s Asian Fund, GAW Capital’s Gateway Real Estate Fund III, and Pioneer Capital Partners’ New Zealand Expansion Capital Fund, according to its 2015 annual report.

In July, the fund sold its stake in fuel company Z Energy for NZ$292 million, returning more than NZ$1 billion to NZ Super since its investment in 2010.

To optimise its portfolio, NZ Super said in its Investment Environment Report published two months ago that it would explore investments in “disruptive themes such as technology, regulation and climate change”.