The New Zealand Superannuation Fund has shed $8.90 billion, or almost 20%, of its value so far this year. But as a long-term investor its CEO says the Super Fund is well-placed to withstand market downturns.
The net asset value of the Super Fund had fallen to $37.78 billion, as of March 17, from $46.68 billion at the end of 2019. That's a drop of $8.90 billion, or 19.5% on an unaudited, before NZ tax, and after costs basis. The fall has come with global financial markets whacked by the Coronavirus crisis.
“As a long-term investor with no substantial withdrawals until the 2050s, the Fund is well-placed to withstand market downturns and our investment strategy is designed with this in mind. The Super Fund has the ability to ride out and potentially benefit from short-term market movements. We use several active, contrarian investment strategies, meaning we’re buying when other investors are selling and vice-versa, in order to further enhance returns over that long time horizon,” NZ Super Fund CEO Matt Whineray says.
The Fund’s long term performance since inception in 2003 sits at 8.75% per annum, versus 7.39% for its passive index Reference Portfolio and 3.78% for Treasury Bills.
“The key with our portfolio to ensure we have the discipline, liquidity, governance and resources to hold our course through the volatility and ensure the Fund is well positioned to benefit from the eventual market recovery, as was our experience in the GFC [Global Financial Crisis]," Whineray says.
Whineray says in a repeat of the GFC, from peak to trough over 10-months, it's estimated the NZ Super Fund would lose $25 billion, or 52.6%, from its $47 billion peak in mid-February.
“We believe equity markets eventually recover to higher fair values following periods of crisis. As a result, the Super Fund expects it will earn back losses suffered by our active strategies in subsequent years as markets recover. In the GFC scenario, the Fund would recover its initial value, and catch-up lost ground, within 20 months, as long as it can 'hold the course' with its investment strategies through a market cycle," says Whineray.
“We take on the risk associated with growth assets to generate higher long term returns, in order to fulfil our mission of smoothing the future cost increases of providing universal superannuation. It is to be expected that a growth-oriented portfolio such as ours will fall when markets experience sharp drops in value."
“The major risk to the Fund is that we close down our investment positions and lock in losses experienced in the current crisis. This would significantly impair the ability of the Fund to fulfil its long-term purpose,” says Whineray.
The current financial market environment is the most volatile since the GFC in 2008, with even steeper share market declines, the Super Fund says.
"The MSCI World, market cap weighted global stock market index of 1,644 stocks from 23 developed markets, has sold off more than 25% so far this calendar year, with S&P500 dropping about 22% for the same period."
In October 2018 Whineray wrote in the Super Fund's annual report that it would shed $20 billion, or half its value, if the GFC struck again. At the time he explained in a video interview with interest.co.nz that he was "not trying to freak everybody out." Rather it was to make the point that the Super Fund takes a reasonable amount of market risk because it has a long-term investment horizon.
Established by the Helen Clark and Michael Cullen Labour Party led government to help meet the rising cost of superannuation payments to retirees, the Super Fund began investing in September 2003 with about $2.4 billion. Between 2003 and 2009, the Government contributed $14.88 billion to the Fund. Contributions were suspended by the National Party led government in 2009, during the GFC, and restarted in December 2017. The Government contributed $1 billion of taxpayers' money to the Fund in 2018/19 and is projected to contribute a further $3.58 billion over the following two years.
From around 2035/36, the Government is expected to begin to withdraw money from the Fund to help pay for New Zealand superannuation. On current forecasts, a larger, permanent withdrawal period will commence in 2053/54.
From Friday Whineray says NZ Super Fund staff will predominantly be working from home until further notice in order to support efforts to slow the spread of Covid-19 (coronavirus) and protect them. Staff halted international travel earlier this month and are only undertaking essential domestic travel, he says.