Super fund's super year

David May, chairman of Guardians of New Zealand Superannuation, says the find will diversify its investments. Picture / Martin Sykes

The multibillion-dollar New Zealand Superannuation Fund topped its long-term target with a 14 per cent return in its first year - but expects tougher times ahead.

The fund's guardians said yesterday that returns in the 12 months to June beat expectations, thanks to strong local and global equity markets, smart work by its investment managers, and effective management of currency fluctuations.

"We have had a very good year, a lot of things have worked in our favour ... the investment markets have been good to us and our managers have performed even better," said David May, chairman of Guardians of New Zealand Superannuation.

The fund grew from $3.985 billion to $6.614 billion. Of the gain, $726.1 million came from investment income (before tax), and $2.107 billion was from Government contributions.

The investment income translates to a return of 14.13 per cent after costs but before tax.

The fund's target over rolling 20-year periods is to beat the risk-free rate of return, before tax, by at least 2.5 per cent. The risk-free rate is the yield on 90-day Treasury bills.

A return of 8.83 per cent for the year would have met that goal.

However, May repeatedly sounded a "health warning" at a media briefing in Auckland. "Because markets can go down as well as up, too much should not be read into the strong results in the first two years," he said.

"The success of the investment strategy will be fully judged over the next 20 to 30 years."

Even so, he said the fund's board was confident that "a sound framework has been established".

Yesterday's result took the fund's average return since September 2003 to 12.5 per cent per annum, compared with a risk-free rate of 5.88 per cent.

New Zealand equities starred among the fund's investments for the year, returning 22.86 per cent and outperforming the benchmark index's gain by 1.9 per cent.

The fund's "conservative line" of hedging offshore returns back to the New Zealand dollar had proved to be "an extremely prudent decision", said May.

Returns would have been halved without the policy.

But in spite of the strong performance by New Zealand shares, the fund is looking to trim its allocation of funds to the sector from 8.4 per cent now to 7.5 per cent by June 2007.

That is despite past barbs from the likes of sharemarket chief Mark Weldon.

May yesterday repeated the fund was wary that it could influence share prices if it invested too heavily in the local market.

Even with its plans to reduce its allocation of New Zealand shares the fund said it would remain "overweight" in the local sharemarket relative to benchmark international equity index the MSCI, because it could see advantages in local knowledge and tax structure.

May also said the fund's active equity managers had done a good job with global equities, exceeding the benchmark MSCI index by an average 2.5 per cent.

The only area where the fund's global equity investments didn't outperform market benchmarks was in emerging markets.

Those markets outperformed the MSCI by 22.2 per cent while the fund's managers fell marginally short of that, securing a 21.1 per cent gain.

The fund is also looking to reduce its allocation of global equities and increase investments in global property and alternative assets such as private equity, infrastructure investments, forestry and commodities.

May said the fund would retain "quite a conservative approach" as it looked at those opportunities.

The fund plans to have 7 per cent of its assets in global commercial property and 13 per cent in alternative assets by June 2007, working towards a long-term target of 25 per cent.

It has already begun moving more into alternative assets, in June committing $23.75 million into high-return but more risky private equity investments with the AMP Pencarrow Private Equity Fund.