NZ Super expects lower fund returns

The New Zealand Superannuation Fund is expecting lower fund returns amid a slower and more volatile investment environment, it said in its latest “Investment Environment Report”.

It expects to generate an average return of 8 to 9 percent per annum in the long term, compared with the 9.6 percent it has delivered since its inception in 2003.

NZ Super makes fund commitments and direct private equity investments, including two dairy farms in Canterbury, and a 42 percent stake in the NZ$1.4 billion ($1.01 billion; €910 million) Kaingaroa Timberlands. Fund manager Nigel Gormley recently told Agri Investor that the fund is interested in acquiring more farms and could look at further timber investment.

Earlier this month, the fund sold its shareholding in fuel company Z Energy for NZ$ 292 million. The investment has been one of the fund’s top performing assets globally, returning more than NZ$1 billion to NZ Super since it had bought it for NZ$ 209.8 million in 2010.

NZ Super allocates 5 percent to private equity, 67 percent to global equities, 12 percent to fixed income, 5 percent to timber, 3 percent to infrastructure, and the remaining 8 percent to other asset classes.

The fund has been re-tooling its fund investments and focusing on “fewer and deeper” relationships with its investment managers. In April, it sold NZ$105 million of fund stakes in three offshore alternative funds.
Last month, it sold a portfolio of private equity real estate funds to Partners Group.

Fund managers it has committed capital to include Bayside Capital, Bain Capital, Apax Partners and KKR, according to PEI Research & Analytics.

It is most exposed to North America at 45 percent. Its exposure to Europe and Asia are 21 percent and 16 percent respectively; Australia and New Zealand account for 15 percent, and South America and Africa 3 percent.

With many asset classes at or above fair value, NZ Super said a relative shortage of good investment opportunities gives them less scope to take on active investment risk than a year ago. It said it is also seeing some “unusual price gaps”, which include low interest rates, a very strong US dollar, heavy discounting for emerging markets and low energy prices.

Against this current backdrop, the fund intends to improve the fund’s diversification and to optimise its current portfolio to account for disruptive themes such as technology, regulation and climate change.

NZ Super manages NZ$30.3 billion of assets as of March 2016.