Key Points:

The New Zealand Superannuation Fund could drop the level of investment it makes in New Zealand shares after a big loss on the local bourse contributed to the first negative return in the fund's five-year history.

The "Cullen Fund" began investing in 2003 to help pay for New Zealand's increasing pension costs bought on by the baby boomer bubble. Yesterday it announced a -4.92 per cent return on investment for the year to June 30.

The negative return saw the fund lose $716 million before tax and $880 million after tax, although a $2.1 billion contribution from the Government increased its size from $13.1 billion to $14.1 billion.

The fund's worst performing investment was in New Zealand equities or shares where returns plummeted 23.4 per cent over the year. Global large cap equities or investments in shares of large companies were down 14.1 per cent while small cap investment was down 19.9 per cent. Property was also down 11.3 per cent, although New Zealand property investment was still positive, and private market investment was down 6.1 per cent.

Commodities, emerging market equities and fixed interest investments were the only asset classes to make positive returns during the year.

Chief executive Adrian Orr said the New Zealand Superannuation Fund was the only sovereign fund which capped investment in its own country. That level is set at 7.5 per cent although on a world scale New Zealand's capital market is only 0.5 per cent of the global market.

Orr said the strategy had been deliberately set to ensure the fund capitalised on the benefits of dividend imputation credits which are only available to New Zealand investors. "Hence we are more exposed that usual."

Orr said the strategy had also been designed with the growth of New Zealand's capital markets in mind but that had not happened.

"Whether the particular opportunity cost weigh against the dividend benefits is something we are closely monitoring," he said. He would not put a timeframe on when a decision would be made but said it was something the fund was looking at on an "ongoing basis".

Orr said despite the negative performance of the last year the fund was still within its expectations for average five-year returns.

The fund's yearly average is now 10.3 per cent per annum, an average of 3.49 per cent per year above the return it would have got if the money had been invested in government Treasury bills instead.

"We are a long term fund. We are well on target to meet contributions for New Zealand superannuation even with the last year."

As a fund targeting growth Orr said it expected volatility and was prepared for it.

Figures from NZX-owned fund research firm FundSource show the New Zealand Super fund's performance was similar to other superannuation funds in New Zealand.

FundSource head Yvonne Davie said the average return for the 24 diversified growth superannuation funds it monitored for the year to June 30 was -7.54 per cent net of fees and taxes.

The Super fund's -4.92 per cent is net of fees and foreign taxes but does not take New Zealand taxes into account although it does pay these to the Government.

The worst performing fund was down 12.2 per cent while the best performing fund was down 2.83.

Davie said the retail superannuation funds were designed for the New Zealand investing public and the only difference between them and the Super fund was that it could access a much wider range of investments.

New Zealand Superannuation Fund returns for year to June 30 (net of fees and foreign tax)

2008 -4.9 per cent
2007 14.6 per cent
2006 19.2 per cent
2005 14.1 per cent
2004 10.4 per cent