The New Zealand Super Fund has blamed weak global markets for a plunge in its annual return from 14.6 per cent last year to just 1.89 per cent in the 12 months to June 30.
However, an improved performance over the last two months saw the fund's 12-month return to the end of August come in at 10.3 per cent.
The fund said it had out-performed its passive reference portfolio benchmark by 0.52 per cent ($155 million), mainly as a result of a strong performance by its timber and infrastructure investments.
Super Fund chief executive Adrian Orr said he wasn't disappointed with the return for the financial year to June 30.
"I try to keep emotions out of the business," Orr said. "We're ahead of our own reference portfolio so our value-add is still very strong."
He said the outlook remained volatile for markets, many of which were trading at elevated levels.
"In terms of our active investments - the investments outside of our passive reference portfolio - it's very hard to find some of the bargains that we've found over recent years," Orr said. "There's a lot of capital floating around the world, chasing rich markets."
Low interest rates and bond yields have been pushing investors towards equities for the income they provide through dividends.
But markets have been on edge in recent weeks about how stocks will react to the US Federal Reserve eventually hiking interest rates, particularly if capital is pulled out of equities as bond yields rise.
"We can see rising global interest rates," Orr said. "You will see re-balancing of global capital when global interest rates start to normalise."
"Some of the money that has been coming into countries like New Zealand is just chasing short-term high yield and that would reverse itself if rates rise."
Orr said the Super Fund, which sat at $31.4 billion last month, was poised for the buying opportunities further market volatility could provide.
"For us, let's make sure that we've got the liquidity and if and when this volatility hits we can take advantage," he said.
"That's what we've been doing since we started investing ... over the long-term, volatility is our friend."
Super Fund chair Catherine Savage said the annual result was "robust" given the low growth, volatile environment.
The MSCI developed markets and emerging markets indices returned -1.88 per cent over the year, according to the Super Fund.
New Zealand's S&P/NZX 50, which has been outperforming most of its global peers, largely as a result of investors chasing yield, returned 20.4 per cent in the year to June 30.
Savage said the fund remained focused on the long-term and had deliberately weighted investments towards growth assets, such as global and New Zealand shares and private businesses including early-stage companies.
"While these assets can lead to short-term volatility in returns, our emphasis on growth is appropriate given the fund's long time horizon and ability to diversify," she said.
"Not every investment will be successful, and the fund's returns will dip from time to time, but investing in growth assets is the best way to ensure that we maximise long-term returns to the taxpayer."
The fund returned 3.7 per cent and 1.2 per cent in July and August, respectively.
Established in 2003 to help fund future superannuation payments, the Super Fund has returned 9.72 per cent per annum since its inception, making it one of the world's best-performing sovereign wealth funds.