NZ Super Fund has lost $8.90 bln so far in 2020 and CEO warns it could get worse but reiterates the Fund is a long-term investor with no substantial withdrawals scheduled until the 2050s

NZ Super Fund has lost $8.90 bln so far in 2020 and CEO warns it could get worse but reiterates the Fund is a long-term investor with no substantial withdrawals scheduled until the 2050s

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.

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44 Comments

Well that's a stupid approach.

No, no. That's an approach of someone who is convinced tomorrow will be like it was yesterday.
At some stage, even the most confident of residents of Pompei; who'd see it all before, tried to make a run for it, and their remains can be seen on display this very day in that same city.
Maybe they're right. Maybe this isn't The Big Re-set. I'd much prefer to head back into Pompei with my panicky pride damaged than risk incineration.

Markets are up, crisis averted... Dismiss and carry on!

AirNZ trades at 0.85 ( last trade at 1.58)

Try to not have a decrease like that without having substantial hedges. I'm sure there will be Kiwisaver accounts that are beating that.

Glass half full. At least there're all those dairy farms which NZSF is invested in, to provide that Liquidity (if slightly Milky) of which they boast....

That linked interview from 2018 is excellent. After first listening to this back in 2018 I committed to myself that when the next crisis struck (which is now) I'd stay the course in a growth fund no matter how significant the short-term losses.

My KiwiSaver is down $20,500 as of today.

https://www.youtube.com/watch?v=h1SdW8KmJrk

Me $40k, glad I got a few years to go to hopefully make a comeback...

Just a flesh wound. Recovery is just a matter of time.

https://www.youtube.com/watch?v=wHtywcyyno0

Stay the course. Selling when the market is already down is the worst thing to do.

Absolutely. Switching at this point poses a real risk of locking in the loss. I only hope my fund manager is buying on the way down.

The loss of what? If selling shares sees you lose only the unrealised capital gains of the bull run - then sell, as you haven't actually lost any of your money. Capital preservation is the name of the game now.

Yikes, this is literally the opposite of what the experts recommend. Loss of value of your KiwiSaver investment and ultimately lower cash drawdown when you retire. You really should watch the interview - it is explained well.

There will be a recovery at the end of this. A prudent fund manager will be converting more liquid assets and buying on the way down so that when the recovery arrives the fund gains more than it lost. The worst thing you can do is sell when the fund is down because getting back in at the right time is much harder than it sounds.

Getting back in at the right time is harder than it sounds? Why? That makes no sense. And 'converting more liquid assets and buying on the way down' - LOL - and (even better) ... following this greatest crash in living memory, hey, you're going to become richer than you were before!!!!

Companies go bust - shares become worthless. I'd go for fixed interest funds (capital preservation) until the dust starts to settle.

How do you know when the bottom of the trough has been reached and it is therefore time to buy? If it was easy everyone would do it. The strategy you’re suggesting is highly misguided and contrary to almost all expert advice. Please glance over the articles below. Stick to what you know and listen to the experts. You are the “amateur” Rob refers to in the second article.

https://i.stuff.co.nz/national/health/coronavirus/120336527/thinking-abo...

https://i.stuff.co.nz/business/120176652/kiwisaver-was-not-designed-for-...

If you are far from retirement you should stay the course in a growth or balanced fund. If you are close to retirement you should be in a conservative or cash fund and not incurring big losses in the first place.

And yes, you can “become richer than you were before“. Again, have you listened to the interview with CEO of the NZ Super Fund? He explains this at 5m15s - 6m46s

https://www.youtube.com/watch?v=h1SdW8KmJrk&app=desktop&t=5m15s

Same % drop as my kiwisaver (so far).

It's fine, don't panic people. Let me remind everyone that sharemarkets dropped around 50% or more during both the GFC and Dotcom bubble bust. This could be as much, or more. Not great if you're about to retire and need the money, otherwise fine, wait it out. Also, buy more near the bottom if you can! You know Warren Buffett will be, again. Unlikely there'll be a better buying opportunity for another decade or more. Buy low: best to do but so hard to do when fear is all around. Also, markets took 18 month or more to bottom out.

I just don't see how the market could re-inflate to anywhere near the ridiculously, insanely over-inflated levels that it had got to.

Nothing - not houses, not stocks, not artworks, not anything was fundamentally worth the monetary values they got to. Utility value is the new buzz.

This is the beginning of the end of that 'wealth effect' madness.

I agree that all those things were really inflated, including NZ housing, which I think will soon have a reckoning. I wish more people saw that earlier. It could take a long time for the market to reach that peak again, yes, which is why buying in the coming deep trough will be a very good thing to do, if at all possible. I hate how so many people a leveraged to the eyeballs in real estate in NZ at high prices. I've been trying to warn about that on this site for ages!

It's the end, until next time. Greed will return, and super fund will likely do great as they continue buying while markets shit themselves.

Remember, they rode the market on the way up and all that is happening is they are giving up some of those gains. If they'd have stuck the lot in the bank there'd be a lot less in the fund right now.

Yes, US and NZ sharemarkets were up nearly 350% from the GFC trough in 11 years! Actually, the first big drop was 11 years to the day. Giving up even 50% or more of that is still okay, but we don't think about that so much.

Balloons don't pop, they just re-inflate?

It's impossible to be certain about the future, but I don't expect this one to be significantly different to other market crashes. It will be traumatic, but in 20 year's time people will look back and wonder what that little blip was in the index.

Or maybe it's civilisation ending, in which case none of this matters anyway.

In 20 years time. Lot's of people don't have that kind of time to when their capital/savings will be needed.

That's true, and people with less than 10 years to go should have rebalanced long ago. The time to consider your risk tolerance and portfolio structure is not when there is blood on the streets.

Why should anyone have to wait 10 years to get their money back? By their, I mean the earnings they saved/put away and their employer contributed (as that's just part of their salary package).

If you've been saving money, you shouldn't have lost anything. And conversely, you never would have seen returns significantly greater than inflation. That's a choice.

The alternative is in invest your money, in which case the volatility is the price you pay for higher expected returns over the long run. If you don't pay the price you don't get the gains.

Well I think there is a chance that global debt is just too much now, and we'll have a "reset", including some historic debt jubilees if things really collapse – not only corporate bailouts and bank deposit bail-ins (bail-ins are legally on the RBNZ table in NZ) – but it depends what happens on the way down I guess.

Yes, and if National hadn't tossed our original super fund out during its early days then there would still be $400 billion in the kitty today.
It'd still have about $400 million even after a 20% haircut and not the miserable $40 billion it has today; and we're lucky to have even that much only because of Labours Michael Cullen's foresight in re-establishing the fund around the year 2000.

This incomprehensible act by National would have to be the greatest act of financial mismanagement NZ has ever experienced. It seems like National was piqued at being upstaged by Labour's far-sighted act in establishing the Fund in the first place.

Housing is where I would be thinking of investing at the moment solely.
We all need a roof over our heads and people invested in shares will be saying never again and we can see why people invest in property now!
Unfortunately so many are having their retirement plans affected significantly at the moment if they were in the equities market that most knew were grossly overpriced.
Housing is still and will always be the safest as you get good returns and good capital gains!

We all need a roof over our heads and that's exactly why past governments had the better tack, that of making housing affordable to average Kiwi workers.

It becoming the preferred, privileged and so-far protected investment instead is the sickness, not the cure. The centrally-sponsored nurturing of "capital gains" at the expense of those who follow in time and must pay larger and larger sums to fund the lifestyles of folk today is part of this malaise.

We need as a country to begin thinking of housing differently, as it was in the past.

To do more dumb stuff like Portuguese bank restructuring?The Funds returns are due to the weak Kiwi dollar and stock market rally, there has been no magic alpha.

"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."

looks alright to me. With a portfolio that big there's bound to be something that turns out to be embarrassing.

Using the T-bill in a CAPM model? it's the risk free rate (without a curve premium either) and can't be compared to equity investments. I'm not against the Super fund per se, just that it shouldn't be $400b. As for the Portuguese loss, I'm not so generous. Several US$ based ETF's would have delivered 8.75% pa - so that's not alpha. That was $200m of tax payers money hosed on a discretionary trade, show me the mandate where that trade was acceptable.

OK, ignore the T-bill bit.

"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"

It's similarly inappropriate to compare to a pure US ETF. The benchmark is mostly global equities.

https://nzsuperfund.nz/how-we-invest/reference-portfolio

I was referring to an equity ETF.

US equities, or global equities? The passive benchmark is primarily global equities. There will always be individual countries where the markets outperform.

Either, I haven't constructed a portfolio! Having a Fund short the Kiwi makes sense (right-way risk), I just don't see the alpha there, a few people using ETF's could replicate the Fund returns. I also don't like the "we're long-term investors" narrative. The winning trades get marked to market while the losers go in the accrual!

Once again...

"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"

The alpha is they outperformed their passive benchmark by 1.39% per annum over a 17 year period. This is impressive. This includes the GFC.

Do you think the benchmark is inappropriate?

For those whose knowledge of NZ political history doesn't extend further back than the year 2000, my above post refers to the start of targetted NZ Super provisioning in 1974 with Labour's Superannuation Act. (not 2003.) After National had petulantly canned this Act less than a year later, Labour's Michael Cullen restarted it in 2001. So due to National's sheer incompetent lack of foresight NZ missed out on more than 25 years of any type of special-purpose Super Fund being in existence:

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=119...

The NZ super will recover from this ...............

It's a bet on the future, like everything.

So mfd is guaranteed to be wrong, at some disputed barricade (with apols to Seeger).

The system has to cease permanently, at some point. Growth does not go on forever - but it has for all mfd's (and Whineray's) life, so they think it's 'normal'. Actually, growth can only be an aberration.

I agree. I'm taking a version of Pascal's Wager - putting my money on the system carrying on long enough for me to benefit from my investments. If the bet loses, then money is probably worthless anyway.

The alternative of hoarding money under my mattress doesn't seem to have much of a pay-off either way.

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.

The good news:

Even those who do have lots of money in the market can be consoled by the fact that lower prices today mean higher future returns. Link