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Learn about New Zealand Superannuation Fund's investment approach, focused on opportunities aligned with their beliefs and efficient access. Explore their reference portfolio and value-add strategies.
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New Zealand Superannuation Fund’s Investment Approach:Adapting to an Unanchored World Matt Whineray II Roundtable, Quebec October 2012 General Manager Investments
NZSF: Quick Facts • Started investing September 2003 • Withdrawals to begin 2029/30 *Excluding cash and foreign exchange hedging instruments
Our Investment Framework Focus on opportunities where there is the strongest link between our endowments and beliefs, and the underlying investment Access opportunities as directly as possible Developing investment themes and opportunities around which our access search efforts can be coordinated Developing and maintaining internal investment opportunity identification and implementation skills Accessing external managers to ‘partner’ with us in segregated or co-investment activity • and
Our Approach: Opportunities and Access Points • Aim for a single top down view across the widest range of investments & a consistent investment approach
Our Approach: Reference Portfolio • Our Reference Portfolio • Low-cost, passive and implementable portfolio which is expected to achieve Fund objective • Degree of risk appropriate for a long-term investor • Chosen by the Board • Provides a benchmark for assessment • Is management adding value with active strategies?
Building the actual portfolio: anchored to beliefs, clarity around risk, reward and responsibility Reference Portfolio Value Adding Activities Actual Portfolio Capture Active Returns: risk “neutral” Portfolio Completion: reduce costs Strategic Tilting: can change risk profile Absolute return and value add strategiesBoard and management Absolute return and value add strategiesBoard and management Management execution of value-adding activities Opportunities & Access Beliefs
Opportunity prioritisation and scaling • Our confidence in expected risk-adjusted returns and the value added by the investment over and above the Reference Portfolio will be highest when: • There is consistency between our endowments and beliefs and the investment • We can clearly articulate factors that drive investment risk and return and we have considered a range of potential outcomes, including downside risks • The opportunity does not require a high level of skill (‘pure’ alpha) as the main driver of expected returns • We have the ability to execute and manage the investment risks ourselves. • Scaling of the opportunity is driven by a risk allocation process that considers the expected impact on the performance of the portfolio (e.g. its Sharpe ratio), relevant constraints (e.g. liquidity, counter-party risk limits and single asset risk limits), as well as relevant organisational demands (tax, legal, etc) and operational complexity.
What it means • No pre-set desired allocation to any particular asset class • Challenge for investment staff initially • Investment staff become specialised in type of access point (e.g. synthetic, direct, external manager) rather than by asset class • Need a clear way to deal with rationing fund illiquidity • Encourages broader approach from investment staff • How does this opportunity rank vs. all others? • How can my access point help the fund access the desired opportunities? • Increased focus on what we are selling to fund this new investment
What we’ve got Actual Portfolio (Pre-Tilting) Reference Portfolio
Proxy system • In general, the proxy system serves the following purposes: • It pre-defines public market proxies for unlisted or illiquid exposures. These are chosen so as to keep the absolute risk of the overall Fund relatively stable as exposure to unlisted exposures varies over time. • It allows the amount and composition of exposure to these value-add investments to be determined flexibly based on the nature of the opportunities rather than by determining fixed target weights (provided that they stay below current limits). • It ensures there is clear accountability, in terms of the opportunity cost, for the impact these value-add investments have on the Fund returns.
Proxy system • There are two ‘slices’ of the reference portfolio that serve as proxies for assets introduced into the Fund: growth and fixed interest. • Each value-add investment has a default proxy which is a set percentage of each of these slices as shown in the table. • Every 1% increase in the Fund weight for timber, for example, would be offset by a 0.3% decrease in the Fund’s growthassets weight and a 0.7% decrease in thefixed interest weight. • The proxies work symmetrically, so thatdecreases in the timber weight are offsetby increases in the corresponding referenceportfolio asset class weights. • Default proxies can be overridden by theInvestment Committee with all overrides reported to the Board. *This percentage applies to the total global equities and global listed property, with the same proportional composition as the Reference Portfolio weights for these two asset classes. Excludes NZ equities.
