KEY POINTS:
So the New Zealand Superannuation Fund has lost $880 million. This is the fund's first loss and the turmoil in the markets represents its first crisis. The fund looks after a huge amount of money (currently $14 billion) and is in the public eye.
Care is taken to
have very good people governing and managing the fund using the best investment practices.
There is a great deal all investors (including those of us in superannuation funds and with KiwiSaver accounts) can learn from the fund's investment strategy and operations - and most particularly, from the fund's reaction to its loss.
The first lesson is the fund has a very clear objective - to beat the risk-free rate of return by 2.5 per cent. Have you got a similarly clear goal?
An extra 2.5 per cent may not sound much. But over the decades that extra return will translate into billions of dollars. For your investments, it would represent thousands of dollars.
To get this extra return, the fund has decided to invest aggressively, with its asset allocation consisting of more than 80 per cent of the portfolio in ownership assets (shares, property, private businesses, commodities) and less than 20 per cent in bonds and cash.
You would expect a portfolio such as this to show high volatility, but the fund is effectively saying: "Bugger the ups and downs - we are long-term investors and we want the higher returns."
We should all think about this approach. Our long-term savings should be mostly in shares and property. They will give us the best returns eventually, albeit with something of a rollercoaster ride.
Too many people have gone into conservative or balanced KiwiSaver funds when they should be like the NZ Super Fund and investing aggressively.
Most people who have joined KiwiSaver are investing for decades, and should put up with volatility to bank better returns.
So now that the fund has hit a bad patch, what has it done about it? Nothing - and neither should it. The fund has set its asset allocation and constantly rebalances so its portfolio is in line with what it needs to get higher returns.
The statements and demeanour of chief executive Adrian Orr suggest the fund managers are quite relaxed about what is happening - they expect volatility and see it as a part of the deal. It would be mad for the fund to change its approach and sell down now to adopt a conservative portfolio.
* Each week best-selling financial author Martin Hawes shares his strategies to help you grow your wealth. You can email your finance questions to info@wealthcoaches.net or andrea.milner@heraldonsunday.co.nz
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