In his column on Saturday Brent Sheather outlined changes that could be made to the NZ Super Fund's investment strategy based on the research of IMF economist Dr Paul Woolley. Here the Guardians of NZ Super Fund respond.
Any retail investor needs to be aware of two things when considering what lessons they might learn from how we invest and how we deal with fund managers etc:
1. Our near-unique investment context. We have a legislated purpose, a very long investment horizon, no explicit liabilities and no capital outflows other than tax until 2031. This directly informs why we invest the way we do.
2. This means we bring very different things to the negotiation table than does just about any other institutional investor, and certainly any retail investor. So we can consider investment classes a retail investor cannot, we can make demands of - and consequently institute fee arrangements with - investment managers which retail investors cannot.
Our context also explains why we do not think Dr Woolley's blanket prescription for the funds management industry is right for us to adopt in full. It would unduly constrain our ability to add value to the fund and would therefore harm our ability to meet the fund's mandate.
Investing in "alternative" assets; first, we do not make investments in private markets and other "alternative" assets because we expect equity returns for less risk. We make these investments because our long-term investment horizon and our ability to make investments which "lock up" capital for longer periods than a retail investor would usually tolerate, means that we can.
More important, being able to make such investments means that we can demand, and get, a premium beyond a suitable risk premium.
Second, in making these investments we are sensitive to the life cycle of the opportunity. We need to understand the amount of capital that is chasing the opportunity - in this we agree with Dr Woolley's argument that the portfolio benefits of alternative assets may disappear when the strategies become widely adopted. The obvious corollary is that alternative assets do have portfolio benefits if the strategies are not widely adopted. Our approach to such investments is to seek and leverage "empty rooms". They may be empty because they are new and not many have noticed them yet. More likely, they may be empty because very few investors have a suitable investment context (eg, they may have high liquidity requirements to accommodate investors exiting their funds, which we do not have), even if the opportunity is clear and otherwise attractive.
Most important, if we do find an empty room and decide to invest, the scarcity or absence of competition means we are in a good position relative to the price at which we access the investment, and on the return premium - one over and above a passive "Woolley" return - that we can demand from it.
Performance fees: There are several things it is important to understand about performance fees.
First, we reject completely the misleading impression in the article that we do not disclose performance and other fees. Brent did not ask about the fees paid, he asked about fee structures. Such structures are, because they are negotiated individually, commercially in confidence. Nevertheless, we provided a typical structure (and we did point out that the fee paid on a case-by-case basis depends on whether the fund was large or small. Because we are a Crown entity we are also required to forecast, every year, what we expect to pay in the coming year in each of those categories, in our Annual Report.
Second, the fund's returns, and therefore how our performance is judged, are disclosed post-fees. Performance fees are paid to managers, and performance bonuses are paid to our investment staff on that basis. So it would be self-defeating to overpay or inflate fees.
Third, performance fees are paid for outperformance of the returns it would be possible to generate passively.
So paying performance fees is, for us and for future New Zealand taxpayers and the present tax base, a great "problem" to have.