Crisis proves golden opportunity for Super Fund

Adrian Orr's number one rule for financial crises. Photo / Steven McNicholl

Super Fund managers stayed focused on core beliefs.

NZ Super Fund boss Adrian Orr is counting his blessings that the global financial crisis happened so early in the fund's life.

As Orr puts it, the crisis opened up a beautiful opportunity to dial up its level of risk years before the fund has start writing cheques to help relieve the tax burden of funding future Kiwi pension payments.

"Nothing beats training than having a real game," he chuckles with obvious relish.

When world financial markets roiled as the crisis took its grip, the fund's board and managers endeavoured to stay focused on some core investment beliefs as they determined their strategic response.

The fund's core investment beliefs are relatively straight-forward according to Orr.

First: that the "market is not efficient" - He cautions that anyone who believes at all times that the prices they are observing are the efficient prices - they're not.

Second, prices will under and over shoot but they will always revert to the mean over-time.

Third, all investments have a life-cycle.

You can enter the best possible investments at the wrong time.

"If you arrive at the same time as a bus load of other investors you've got to have the ability to step the other way."

The upshot was that the Super Fund - whose legislative purpose is to reduce the tax burden on future New Zealanders of the cost of NZ Superannuation - managed to hold its focus on the long-term and retain its risk tolerance as the rewards for risk increased. Since the worst of the crisis (March 2009) the fund has experienced a significant rebound in its returns.

So what are the lessons the fund learned that can inform decision-making when future crises strike?

Orr singles out four:

1 Don't panic - hang tough. Don't sell out of assets (or sack managers) because their recent returns were poor. In fact, if you hold faith in the long-term value of the assets you should probably be buying more.

2 Be prepared to move quite dramatically - which is hard because normally investors are tied to benchmarks - with the potential for under-performing for one, two, three years. But stay focused on your absolute long-term returns.

3 Focus on getting closer to investments than before. If you have concerns about the principal agent or intermediary, go direct and get them out of the way. Test the relationship yourself.

4 Stay focused on liquidity. All funds no matter what their horizons are have to worry about this as otherwise they can get "stocked out" where they can't meet their daily cash payments because they have long-term investments that are out of the money. "If it's going to suck up liquidity - we say we want to be paid more for that up to the point we don't do it," adds Orr.

The fund takes the view that the market operates in three-five year cycles.

Shocks - by definition - can't be absolutely predicted. But long-term returns will continue to be there.

Says Orr: The risk premium was non-existent in 2005/2006; That's when it hurt most to invest, not in 08/09. It hurt to be putting money into listed equity markets when you knew you weren't going to be fully rewarded for the effort. It's been much easier the last two years - bring it on ...

"If you love Citibank at US$80, you'll love it at 50 cents. No-one's going to kill me if I lose fifty cents, but I'll be a hero if it goes to US$2."