Review leaves NZ Super Fund's Reference Portfolio heavily weighted to equities

The New Zealand Superannuation Fund will retain its strong weighting towards equities for at least five years.

A five-yearly review by the Guardians of New Zealand Superannuation, the manager of the Fund, has decided its Reference Portfolio’s current mix of 80% equity and 20% fixed income is appropriate, given the Fund’s 20 year-plus investment horizon. The Guardians say the Reference Portfolio is selected as the lowest-cost access to the most relevant, liquid, market exposure the Fund needs to meet its mandate, providing both economic return and a benchmark for active investment.

The Guardians say they expect the Reference Portfolio to return 7.7% over 20-year periods, 2.7% above the estimated risk free, Treasury Bill, interest rate.

“Setting the Reference Portfolio is the most important decision we make as a Board," Guardians Chairman Gavin Walker said. "The Fund’s long timeframe and certain cash flow mean it can take on more equity exposure than many other investors. We are satisfied that the 80% growth, 20% fixed income ratio is appropriate."

"We are prepared to weather volatility in fund returns as asset prices fluctuate in the short-term - indeed, as the Fund experienced during the Global Financial Crisis - in order to maximise long-term performance," Walker added.

The Fund was established by the then-Labour-led government in 2001 to help pre-fund universal superannuation benefits and isn't projected to start paying out money until 2031/32.  As of April 30 this year the Fund's size stood at $29.65 billion having returned 10.30% per annum since inception. 

The Reference Portfolio’s 5% allocation to listed NZ equities also stays unchanged, although the Fund's actual portfolio currently has about 7% invested in listed NZ equities and about another 8% in other NZ assets. Changes to the composition of the Reference Portfolio include lifting the global equities allocation to 75% from 70% with 65% of this targeted at developed markets and 10% at emerging markets.

Meanwhile, the Reference Portfolio’s 5% allocation to global listed real estate investment trusts has been dropped because the Guardians believe the Fund gets sufficient exposure to listed real estate through its global equity exposure.

The Reference Portfolio will remain hedged 100% to the New Zealand dollar.

“This provides a very clear performance benchmark for any active currency investments we make outside the Reference Portfolio,” chief investment officer Matt Whineray said.

The Reference Portfolio approach to managing the Fund was introduced in 2009. Over its first five years, the Reference Portfolio returned 13.2%.

"The actual Fund generated an additional 3.65% p.a. ($4.55 billion) over the period through active investment decisions made by the Guardians. Currently, around 70% of the Fund is invested in line with the Reference Portfolio," Whineray said.

“We only make investments outside the Reference Portfolio when we are highly confident that they will improve the Fund’s performance versus the Reference Portfolio." 

The Reference Portfolio will be reviewed again in 2020.

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7 Comments

Not sure that 5% is the current nominal yield on a T-Bill implied by this piece. It is much lower ~3%?.

In anywise, why would you benchmark returns of your reference portfolio asset allocation decision (which has a 20 year investment horizon) against short term cash?

LOL - one cannot get the right staff these days.

1st of all, the performance of the Fund is benchmarked against the Reference Portfolio. So the Reference Portfolio IS the benchmark.
2nd, T-bill is used as another "benchmark" because it's the Govt's borrowing cost - or the opportunity cost to the Govt of investing in the Fund.

"Setting the Reference Portfolio is the most important decision we make as a Board," Guardians Chairman Gavin Walker said." ( I assume this is the same Gavin Walker that was John Key's boss at Banker Trust), yet the Reference Portfolio is "a shadow or notional portfolio.." ..so no actual funds employed, I guess. My suggestion to Gavin Walker is that there are far more important things that his Board has to decide upon than the notional hurdle determinant for the investment staff at the NZ Super Fund....Out-performing your own benchmark can't be that hard!

Yes indeed - the bigger concern is achieving the funded targeted return in an environment where U.S. equities are being pushed along by the fewest stocks in more than 15 years and some of the companies on that list are reliant on tax avoidance tactics to sustain buyer support.

Awesome comment. Boeing said the most important decision in plane design these days is fuel economy - and Stephen Hulme said "Wrong! the bigger concern is the plane should be able to fly!"

Granted. But really...

Granted. But really...

Boeing might have guessed the airlines would have paying passengers to buy fuel to keep the enterprise airborne rather than borrowing to do so.

.....because of low interest rates, high quality investment grade corporations have borrowed hundreds of billions of dollars, but instead of deploying the funds into the real economy, they have used the proceeds for stock buybacks. Corporate authorizations to buy back their own stock are running at an annual rate of $1.02 trillion so far in 2015, 18% above 2007’s record total of $863 billion. Read more