Super fund takes on more risk

New Zealand Superannuation Fund boss Adrian Orr. Photo / Steven McNicholl

Less than 1 per cent of the New Zealand Superannuation Fund is directly exposed to European banks, says its chief executive, Adrian Orr.

As Europe's leaders scramble to stave off a Greek default, concern is growing that these banks will suffer big losses on government bonds.

According to estimates, banks may need to boost capital by as much as €400 billion ($694 billion) to cushion themselves against likely defaults.

But instead of being alarmed by the region's instability, the fund is taking advantage of "incredibly low" asset prices, according to Orr.

"Large cap, or big-company equity exposure, makes up about 57 per cent of the fund. Of that, around 17 per cent is European and of that around 10 per cent would be banks. When you work your way through all that it ends up being something less than 1 per cent of the total fund. It's a very small percentage of the book," he said.

The fund is a multibillion-dollar investment vehicle which aims to grow the public money put aside to meet future superannuation payments.

The Government is not due to withdraw from the fund until 2029. Orr said it had no direct exposure to Greece and the "distress and dislocation" offered big opportunities.

"We have been actively taking advantage of pricing where it is," he said. "We've been leaning and taking on board more risk rather than stepping away from the risk because prices, in particular for financial assets and bank assets, are incredibly low on a historical basis.

"In one sense you kind of wished you owned more on that side.

"At the moment, prices are extraordinarily [far] away from medium terms of fair value and so those create good buying opportunities ... but that of course means weathering the short-term [market] noise."

Orr said this strategy "proved very strong" for the fund during the 2008 global financial crisis.

"We were able to dial up during that incredible period of uncertainty and it's come back home in spades, 15 per cent one financial year, 25 per cent last financial year."

The Super Fund was established by Michael Cullen in 2003 with $2.4 billion of cash. At September 30, 2011, its total assets amounted to $16.6 billion, which included investments in New Zealand of $3.5 billion.

- Additional reporting Bloomberg