The New Zealand Superannuation Fund (NZ Super) is expecting lower fund returns amid a slower and more volatile investment environment, it said in its latest 'Investment Environment Report'.
It expects to generate an average return of 8 percent to 9 percent per annum in the long term, compared with the 9.6 percent it has delivered since its inception in 2003.
NZ Super makes both direct private equity investments and fund commitments.
Earlier this month, the fund sold its shareholding in fuel company Z Energy for NZ$292 million ($206 billion; €186 billion). The investment has been one of the fund’s top performing assets globally, returning more than NZ$ 1 billion to NZ Super since it had bought it for NZ$209.8 million in 2010. NZ Super has also invested in MetlifeCare, Meridian Energy and two dairy farms in Canterbury.
The fund has been re-tooling its fund investments and focusing on “fewer and deeper” relationships with its investment managers. In April, it sold NZ$105 million of fund stakes in three of its offshore alternative funds – Hellman & Friedman VII, growth equity fund JMI Equity Fund VII and debt vehicle HIG Bayside Loan Opportunities Fund II.
Last month, it sold a portfolio of private equity real estate funds to investment firm Partners Group. These comprised stakes in two Asian funds, Gaw Capital Gateway Real Estate Fund III and Red Fort India Real Estate Fund II, and three Europe-focused funds.
NZ Super allocates 5 percent to private equity, 67 percent to global equities, 12 percent to fixed income, 5 percent to timber, 3 percent to infrastructure, and the remaining 8 percent to other asset classes.
Fund managers it has committed capital to include Bayside Capital, Bain Capital, Apax Partners and KKR, according to PEI data.
In terms of geography, it is most exposed to North America at 45 percent. Its exposure to Europe and Asia are 21 percent and 16 percent respectively; Australia and New Zealand account for 15 percent, and South America and Africa 3 percent.
With many asset classes at or above fair value, NZ Super said a relative shortage of good investment opportunities gives them less scope to take on active investment risk than a year ago. It said it is also seeing some “unusual price gaps”, which include low interest rates, a very strong US dollar, heavy discounting for emerging markets and low energy prices.
Against this current backdrop, the fund intends to improve the fund's diversification and to optimise its current portfolio to account for disruptive themes such as technology, regulation and climate change.
NZ Super manages NZ$30.3 billion of assets as of March 2016.