The NZ Super Fund's Matt Whineray on explaining the difference between volatility and risk, the Fund's focus on equities & not being forced to sell

By Gareth Vaughan

New Zealand Superannuation Fund CEO Matt Whineray says he's "not trying to freak everybody out" with the section in the Fund's annual report talking about the Fund losing $20 billion, half its value, if the Global Financial Crisis (GFC) was to strike again now.

The Super Fund's annual report was issued on Thursday, with the running of this GFC scenario catching the eye. This was even though the Super Fund estimates the massive losses could be recouped within about 20 months.

 Whineray told interest.co.nz in a Double Shot interview the Super Fund is not predicting or forecasting another financial crisis. Rather it's using a familiar scenario as a way of illustrating volatility that could occur.

"What that section in the annual report is called is Volatility and risk, understanding the difference. And what we're trying to do with that is say 'we make a choice in terms of our portfolio construction and our choice is to take a reasonable amount of market risk.' That's 80% of our reference portfolio comprises growth assets, so equities. We do that because we have a long horizon. At the moment we're not expecting to have any sustained [fund] withdrawals for more than 30 years, into the 2050s," says Whineray.

The Fund’s high exposure to growth assets is set by its board through its 'Reference Portfolio', a simple passive low-cost portfolio of listed equities and bonds that serves as a benchmark for the Fund’s investing activities.

Whineray says the long-term focus allows the Super Fund to look through short-term market fluctuations and earn the premium over time that comes with owning equities.

"You earn that premium because you are able to weather the ups and downs along the way. So that's what volatility is and we're saying 'look our portfolio comes with a reasonable amount of volatility.' We look like an aggressive KiwiSaver fund."

"Risk is different. Risk is often conflated with volatility because you'll hear financial reports and they'll say 'VIX today,' which is a measure of really short-term one month volatility, 'is up, so markets are riskier.' But for us risk is different. Because for us the risk is not that we see volatility, we know we're going to, that's an outcome that we've made in terms of choice of our portfolio. The risk is that we don't have the discipline, or the capabilities or the support from our stakeholders and in a broader sense stakeholders are government, media, public, that we don't have the support to hold the course on our investment strategy," Whineray says.

"So that's the distinction I'm trying to make."

"I'm not trying to freak everybody out with the maths of the GFC. That's all it is. This is application of maths. It's a recent event, it's in people's memories, we're a lot bigger now than we were then, we're about $40 billion now, we were about $14 billion then." 

"I just want people to understand we've made this choice, it comes with these consequences. We've made it for a good reason, which is we will earn more over time as a result of that. But we've got to be able to hold the course and so I want everyone to understand that that's our risk. The risk is that you cannot see through the short-term stuff to be able to earn the long-term returns," says Whineray.

Furthermore he acknowledges that all financial crises are different and when the next one strikes it won't be the same as the GFC either in how quickly it takes effect, or how quickly global financial markets recover from it.

"There are so many variables in this. I absolutely take the point that the next one will be different and your starting point will be different, and your starting point in terms of the leverage in the financial system will be different. So there's a lot of different variables. We're not trying to forecast a crisis, we can't do that, we certainly can't forecast the shape of what that will look like," says Whineray.

"What we need to do is be resilient."

"So what we do in response to this is say 'we're going to maintain a bit more liquidity in the fund, we're going to hold higher levels of liquid assets than we might on average.' And we'll end up with a fund that has less active risk. And for us active risk is the difference between our active portfolio and reference portfolio and the easy way of saying that is we just think there are less opportunities to step away from it so we do two things; 1) we've got more liquidity available and 2) we've got more active risk available. And that does a couple of things for us 1) it allows us to weather the storm, whatever form that storm comes in, we can make sure we can survive the storm. And the second point is it allows us to take advantage of those times when markets are panicking and people are selling. We don't have to and that's really important. That's our key endowment as a long horizon investor - don't ever be forced to sell," Whineray says.

Meanwhile he says there no pressure on the Super Fund to move away from its equities heavy asset allocation.

"One of our critical advantages that we think we have is that we have operational independence," says Whineray. "So critically there is no pressure on us to change our asset allocation right now." 

Nonetheless an independent review of how effectively and efficiently the Guardians of NZ Super, the Fund's manager, is performing is carried out every five years, as required by the New Zealand Superannuation and Retirement Income Act 2001. The next review is due in 2019. Whineray says Treasury is currently working on the terms of reference. Among other things, the review will look at the reference portfolio framework, the choice of asset allocation, how performance is calculated, and how risk is measured. Treasury will appoint someone to undertake the review early next year.

*This is part 1 of a two part interview.

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11 Comments

Great article.
It is of benefit to both Whineray and the public (after all I would like to think that it is our money and that we have a vested interest) that there is good communication. Whinerary has explained his position well; not only are we informed, but if it ever turns to custard (possible likelihood in a 30 year period) then the public is informed.
I trust that Whinerary continues to communicate on a reasonably regular basis. His predecessor Adrian Orr' strengths were not only being astute but also a good communicator especially in his new role.

Strikes me as a smart and capable guy, I think the fund is in good hands. He has big shoes to fill.

I do however think his comments about the effects of another GFC on the fund might have the opposite effect of what he intended. Most people don’t differentiate between volatility and risk when it comes to investing. Him pointing out that the fund is volatile, particularly when few people read beyond the headline, will probably scare some and could lead to some of the stakeholder pressure to not stay the course that he eluded to.

Yeah well the loss of $20B would have me running for cover. Its all well and good to be informed, but a loss is a loss, I mean like "I told you so" doesn't really help does it ? better to have your money in something that is not open to be smashed to that degree in the first place.

In that case, they would make significantly less money every year there is not a GFC style crash. Most years do not have significant crashes.

When a fund is running for 30+ years the serious risk is in regular underperformance which would leave the country billions of dollars poorer purely to avoid a bit of volatility.

Big shoes to fill? He's been the brains of the operation for some time.

Yes, big shoes to fill. He only replaced Adrian Orr a few months ago. The fact that Whineray was previously the CIO doesn’t mean that Orr didn’t leave big shoes to fill. You think the guy that left to be Governor of the Reserve Bank didn’t leave big shoes to fill? Please.

it sounds as though the superfund should be looking at the "mix" or allocation of those assets at the moment. clearly chasing risk premium at the top of the cycle is a far riskier proposition than at the bottom. Smart investors are decoupling that risk now.

With the timeframes they operate in, it's all about having a strategy, executing the strategy, and doing your best to ignore what is happening right now.

Good of them to be really upfront about the risk, and their take on that risk.

Wind up the Super Fund and distribute the proceeds - 9k for each citizen. Would be a great stimulus!!

Then take $20k back over the next 20ish years to fund super.. except that will all be taken of those that are still working.. So give boomers another $9k bonus now and tax gen X and younger even harder in future to pay their super later? Yeah, my answer to that idea is something along the lines of [bleepity bleep bleep! ....And the horse you rode in on. ]

What investors are fearful of is that a crisis comes right at the time they have made their plans to retire. It's all very well saying to wait until recovery happens, but that's not always possible. Not great to find that on the eve of your retirement, your expected income is suddenly halved.