Adrian Orr: Retire the cynicism - fund's on track

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A Weekend Herald feature article on retirement income savings was strongly critical of the New Zealand Superannuation Fund's construct and recent performance. In response, I note the following.

Investing for future retirement income is just one activity the Government does. It is equally valid to talk of government borrowing in order to fund tax cuts, or pay for schools and hospitals. All of these activities are funded through tax revenue and borrowing. This is an everyday practice across households, businesses and governments globally. In fact, the New Zealand Government has done well, with one of the lowest government net debt positions in the OECD.

The Government has been running a public debt programme throughout the entire life of the fund. The fact that the Government's operating accounts have gone into deficit makes no difference to the investment proposition of the fund. Neither do the returns to the fund impact on the variability of their debt programme.

The fund is a simple concept. The Government has legislated to invest money today to gain a return over the long term. That return is to be used in the future to smooth the tax burden of the rising cost of superannuation income.

One measure of financial success is whether the returns to the fund over decades (not randomly selected days, weeks, months, or year-to-year) are above the cost of government borrowing.

When it comes to saving for the future, there is no free lunch. If we don't save now the retirement payments time bomb in the future simply grows.

Credit rating agencies and bond market participants understand this.

A government is in a great position to benefit from investing over decades, more so than any individual. It can focus on the long term and, hence, make investment decisions not available to many. It can capture this premium. It has the ability to ride out the tough patches and avoid "fire sales".

And, it can fund this activity at the cheapest rate, as well as receive the tax on its local investment income. The "hurdle rate" for success is as good as it can get.

Right now, the earnings prospects for long-term investors have also just improved significantly. This is especially so for a young Super Fund like ours, with the weight of money ahead. The global recession has seen asset prices fall and the rewards for accepting investment risk rise to historical levels.

That's not to say investment opportunities may be better again in 12 or 24 months' time. But, as long as we are able to buy more as value opportunities arise, and not be forced to sell assets at "fire sale prices", we will succeed in our task. History also teaches us that the best time for investment returns is after significant downward corrections. We must make sure NZ is positioned to benefit whenever this occurs. Stopping out now would ensure we suffer the downside
and miss the inevitable leg up.

Putting money only into cash or fixed interest dooms the fund to failure from the outset. The future retirement income liabilities, which follow nominal wages, will outpace the returns.

The fund is invested for the long term across a very wide range of assets that give us the best chance of buffering rising future retirement income payments. Diversification is the best means of managing investment risk.

The Guardians legislation was designed to provide clarity of purpose, operational independence and transparency. We have deliberately and repeatedly highlighted the wide range of year-to-year outcomes we expect over the lifetime of the fund. We have used our annual reports to illustrate this.

Our running results are posted on www.nzsuperfund.co.nz as are all of our investments. These are to be viewed over five-year moving averages at the shortest. Anything shorter allows people to tell whatever tale they feel (even happy ones).

We specifically do not try to forecast and manage the portfolio around expectations of near-term events. Mostly, this is near-impossible and leads to a lot of cost and lost opportunities. Exactly when a boom or bust will happen, what will trigger it, how it will unfold and what the investment implications may be cannot be forecast with useful precision - otherwise they would not happen.

When I took over two years ago following my role at the Reserve Bank, I inherited a deliberately chosen set of risk assets to weather the long term, anchored on clear investment beliefs.

Since then, we have been able to attract and retain world-class people, and continue to implement a significant New Zealand and global investment strategy. We greatly increased our ability to manage and monitor our risk and liquidity, and our ability to invest in market-tracking indices, so that we can be flexible and cost effective.

We have raised the hurdle on our investment managers and let some go, and we have introduced tougher due diligence processes. And we have deliberately reconsidered our global private equity and property strategies.

Finally, and perhaps most importantly, we are in a position where we can move quickly when opportunities arise and there are plenty of these just around the corner.

We have done this while weathering a massive financial storm without being forced into fire sales. We have benchmarked ourselves against the best in class long-term investing fraternity.

They have all experienced the same near-term challenges and remain committed to long-term investing. We remain in a strong position to achieve our 20+ year target. These are testing times which bring opportunity and demand investment courage.

* Adrian Orr is chief executive of the NZ Super Fund. During research for the feature, fund staff told the Herald he would not be available for an interview.

- NZ Herald

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