Opinion: Adrian Orr responds to critics of NZ Super Fund
5th Mar 09, 12:58pm
By Adrian Orr There has been plenty of commentary about the purpose, current performance, and investment practices of the New Zealand Superannuation Fund in recent weeks. Should it exist, does it make sense to borrow to invest, should more go into New Zealand, and in these times should we take a contributions "˜rest'? These are all decisions the Government must make and it is not the role of the Guardians of New Zealand Superannuation to make them. Instead, we operate to the legislation of the day. What is that? The Fund is a simple concept. The Guardians are legislated to invest money today to gain a return over the long-term. That return is to be used in the future to smooth the tax burden of the rising cost of New Zealand Superannuation. The Guardians guiding legislation was established to enable this to occur "“ providing known capital inflows, operational independence, a commercial and prudent investment requirement, and a long horizon and near universal set of investment choices. Underlying it is the principle that a government is in a great position to benefit from investing over decades, more so than an individual. It can focus on the long-term and hence make investment decisions not available to many. It has the ability to ride out the tough patches and avoid "˜fire sales'. And, it can fund this activity at the cheapest rate and receive the tax on its local investment. This is the same whether a government's operating accounts are in surplus or deficit. And, the returns to the Fund from year-to-year do not impact meaningfully on the government's debt program "“ the capital contributions formula sees to that. In other words, the chance of investment success is as good as it can get "“ but it is not risk free. Unfortunately, putting money only into cash or government bonds dooms the Fund to failure from the outset. The future retirement income liabilities, which follow nominal wages, will outpace the returns. The Fund is invested for the long-term across a very wide range of growth assets globally (listed and unlisted equity, property, timber, infrastructure, commodities, and credit). These are the assets that give us the best chance of achieving our purpose. For example, the earnings prospects for long-term investors have improved significantly recently. This is not denying we are in for tough economic times. Precisely, the global recession has seen asset prices fall and the rewards for accepting investment risk rise to historic levels. Recession is priced into these assets. However, markets are forward looking, but not necessarily long-term in focus. History teaches us that the best time for investment returns is after significant downward corrections, for those able to stay the distance. While uncomfortable in terms of printed marked-to-market returns, it is a good strategic position for the Fund to be in, as a long-term investor with the majority of contributions ahead. Averaging in to an equity portfolio at low prices is an important component of success. Purposely we do not manage the portfolio around expectations of near-term events. It is just about impossible and leads to a lot of cost and lost opportunities. Exactly when a boom or bust will happen, what will trigger it, how it will unfold, and what the investment implications might be can not be forecast with useful precision "“ otherwise they would not happen. Instead diversification is the best means of managing investment risk. And it has not failed. Imagine if you only invested in Lehman Brothers shares? If our returns are ahead of the Government borrowing rate over the next 20 years, economic value has been added and the tax smoothing role of the Fund can be achieved. The Fund will not be called on for capital outflows until 2027. Our financial performance is thus measured in decades - not some randomly selected day, week, month, or year. Our short five year history to date highlights some of the twists and turns we can expect. This is the volatility that long-run investors endure and what throws up the opportunities. Our Annual Report and other background material highlight this explicitly www.nzsuperfund.co.nz. Meanwhile, we remain a very active investor in New Zealand. Currently approximately 27% of our assets are here. In some cases New Zealand assets are favoured over their foreign equivalents. For example, local infrastructure assets may provide a better match than global infrastructure assets to nominal wage growth in New Zealand. However, expanding our New Zealand investment role requires sufficient availability of opportunities in all asset classes, and our potential to divest when needed. As New Zealanders, of course we desire outcomes such as increased investment for New Zealand infrastructure, closing any shortfalls in local firms' capital requirements, and widening and deepening our capital markets. These are also natural outcomes of our commercial investment activities in New Zealand. The Fund has a set of investment assets selected to weather the long-term and grow. Our challenge is to manage through the ups and downs. These are testing times which create the opportunities for long-term investors. To view NZ Herald Opinion Piece and background information, please follow this link: ______ * Adrian Orr is the CEO of the Guardians of New Zealand Superannuation.