NZ Super Fund returns 18.2 per cent in year to May

Michael Frith, chief economist at NZ Superannuation Fund.

The New Zealand Super Fund has avoided any major financial fallout from political turmoil around the world in the past year.

The fund - set up set by the last Labour Government under former Finance Minister Michael Cullen to offset the future cost of national superannuation payments - said it returned 18.2 per cent in the year to May - 2.8 per cent or $800 million above the return on its own benchmark reference portfolio.

The fund is now worth $35 billion.

Throughout the period there has been presidential elections in the US, Britain's vote to exit the European Union, and renewed turmoil in the Middle East, among other events.

The past six months have delivered robust and broad-based global growth, with real, positive improvements across nearly every market, sector and geography, the NZ Super Fund said.

World growth projections have been revised upwards, and the IMF expects the world economy to grow by 3.5 per cent in 2017 and by 3.6 per cent in 2018.

European and Japanese economies have finally responded to stimulatory monetary policy, and emerging markets look to be rebounding from their cyclical lows of recent years, the fund said.

The United States economy remains robust and supported by a strong labour market.

Growth is expected to accelerate if the anticipated fiscal stimulus from the Trump administration's policies is delivered, it said.

"Our overall use of active risk remains under budget, reflecting our view that many assets are at or above fair value. As a result, the majority (68 per cent of our investment remains in the Reference Portfolio.

"When combined with our active investments, the fund remains strongly weighted toward growth assets," it said in a statement.

Early this year, the fund, along with NZ Post and ACC topped up their investment in Kiwibank to bring the bank up to speed with Reserve Bank of New Zealand rules regarding convertible capital instruments.

"We continue to look for scalable investment strategies that allow us to use our endowments of a long horizon, stable risk aversion and liquidity profile," the fund said.

Michael Frith, chief economist at the fund, said that despite volatility on the world's political stage, market volatility - as measured by America's so-called VIX index - had been subdued.

He said the post-Global Financial Crisis years - which have seen central banks adopt very low interest rates to try and stimulate growth - had been extraordinary.

"It's been a crazy eight or nine years," Frith said. "For economists - who look at the world through their various models - it has been a bit of a struggle but we think that the global economy is doing okay."

Today, he said equity markets here and around the world "look to be fully priced".

"We have gone through a period of exceptional returns over the last two, three or four years, but they are not the norm," he said.

"We anticipate lower returns. We are not saying that markets are going to crash but we say markets are not going to keep going like they have done," Frith told the Herald.

"If economies keep growing at 2, 3 or 4 per cent, and earnings keep growing - then equity markets can continue to track upwards to reflect that growth," he said.

"Corporates in the US are starting to invest again after a long time of not investing - so that again can drive earnings," he said.

"We have strategies that allow us to lean against markets we think they are overvalued or undervalued," he said.

"Those strategies have been very successful for us in the last few years as markets have returned to normal," he said.

Looking ahead, he said the fund was pursing some key investment themes, such as climate change, evolving demographics, and alternative energy sources.