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.