NZ Super misses reference, mixes active returns, makes life changes Investment News | Investment News NZ

The NZ Superannuation Fund (NZS) fell just shy of its reference portfolio performance for the second year in succession.

In line with results reported by the Accident Compensation Corporation (ACC) fund a week earlier, the now almost $80 billion NZS ended just .024 per cent behind its reference portfolio for the 12 months to June 30 following a .015 per cent miss in the 2022/23 financial year.

And like the ACC fund, the NZS attributes its under-benchmark investment outcome to booming share indices led by the ‘magnificent 7’ stocks in the US.

In its latest annual report released last week, the NZS says: “The result was similar to other years in which strong public markets outperformed active strategies over a short time period; our active strategies are of course designed to leverage our investment horizon and play out over longer periods

“Over five, 10 and 20-year periods, the Fund has comfortably exceeded the Reference Portfolio benchmark; and over the Fund’s lifetime, taking an active approach to investment has generated $17.28 billion more than a passive approach would have done.”

The reference portfolio, an 80/20 blend of passive equities (including 5 per cent tracking the NZ share index) and global fixed income, is slated for a formal review in 2025 after delaying the five-yearly process “until we finalised the make-up of our Leadership team”.

In an unusual move last week, the NZS named Brad Dunstan and Will Goodwin as joint chief investment officers as permanent replacements for Stephen Gilmore, who left in June to take the CIO job at CalPERs in the US, one of the world’s largest pension funds.

Long-time NZS staffers, Dunstan and Goodwin – respectively, acting general manager portfolio completion and head of direct investments – shift into the joint CIO mode on December 2.

Despite missing the reference target, the fund was up 14.9 per cent after costs (but before tax) for the 12-month period amid some mixed performances for its active strategies that comprise almost 40 per cent of the portfolio.

For example, the core multi-factor global equities portfolios – that represent the bulk of the NZ exposure to international shares – outperformed.

“Most of our targeted factors performed well, with value as the highest-performing factor and low volatility as the only factor that detracted value,” the report says.

“Our Opportunistic opportunity was our biggest detractor, mostly driven by the stock price of one of our investee companies,

LanzaTech. This opportunity comprises investments in several different companies, around half of which outperformed the proxy.”

And while the NZS internal actively managed local equities mandate ended under-index as a whole for the year, the recently switched-on machine-learning portfolio, dubbed Keorangi, was a benchmark-beater.

Keorangi “continued to outperform targets and has now grown to over NZ$100 million, with internal approval being granted in January to increase capacity to NZ$250 million”, the report notes.

But the long-running star NZ active overlay, strategic tilting, slipped into the red over the 2023/24 period – its first negative result in eight years.

Strategic tilting “remains the NZ Super Fund’s highest contributor to value-add since inception at approximately $4.5 billion”, the report says.

“Returns this financial year were positive for rates, credit and real estate investment trusts, but negative for equities, foreign exchange and commodities.”

The NZS made a handful of, previously revealed, external investment mandate changes during the financial year but the report also flags the death of another.

“We terminated our Life Settlements opportunity, which involves the purchase of life insurance policies in the secondary and

tertiary markets,” the report says. “Our analysis showed the drivers of return for the opportunity diminished over time, and this remained a niche asset class where investment could be difficult to scale up as the NZ Super Fund grows. We have exited our life settlements swap

arrangement with Credit Suisse, and our investments via Apollo will be wound down over the next few years.”

The fund reported total costs of almost $262 million for the 12 months to June 30, amounting to a per-asset expense ratio of 0.37 per cent – down from 0.43 per cent last year, largely due to lower performance fees.

Jo Townsend, who joined as chief this March, says the NZS was focusing on its new ‘Guardians of the future’ strategy, designed to update the fund’s investment, operations, team culture and ‘external presence’.

“In particular, we are focused on how we can make the necessary adaptations without losing the culture and organisational character that has made us both successful and a place where very good people want to be,” Townsend says in the report. “This is particularly relevant as the size of the Guardians has grown rapidly over recent years; we added 25 to our headcount in the last year.”

As at June 30, NZS reported about 238 full-time equivalent staff compared to 154 in 2020.