Bosses shun pricey assets as markets keep rising.

The New Zealand Superannuation Fund is cutting back risk, saying most of the major asset classes and investments it tracks are trading at or above fair value.

In a report released yesterday, investment analysis manager Roland Winn said equity markets globally had recovered from the "remarkable volatility" of early 2016.

"With many asset classes at or above fair value, there is a relative shortage of outright good investment opportunities," Winn said. "Consequently, we are taking on less active investment risk than a year ago."

Stubbornly low growth in the global economy has failed to dampen an ongoing rally in many equity markets.


New Zealand's S&P/NZX 50, for example, has gained 7.6 per cent this year and has surged 181 per cent since March 2009. It's now trading at roughly 19 times earnings, which is well ahead of the historical average.

Wall Street's bull market - which also began in early 2009 - became the second longest in history in April.

Winn told the Business Herald that the $30.3 billion fund, established in 2001 with the aim of helping to pay for the future costs of superannuation entitlements, wasn't calling the top of the market.
"We'd say that over the last four to five years, markets have had a very good time," he said. "Quantitative easing and monetary policy have obviously resulted in very good returns ... longer-term, we think market returns will be lower than they have been in the last five to six years and as a result the fund returns will be lower."

In addition to equities, Winn said bond markets were also looking pricey.

"Sovereign bonds - we think they're outright expensive," he said.

Winn said that as a long-term investor, the fund didn't need to "chase markets".

"For example, over the last six months the proportion of the fund that is invested actively outside the [passive] reference portfolio has fallen by 5 per cent," he said.

Passive investments account for around 75 per cent of the total portfolio.

Winn said the fund was taking "overweight" positions in investments that offered the best long-term, risk-adjusted returns.

Winn said the fund was focused on improving diversification, seeking opportunistic private market deals and optimising its portfolio to account for "disruptive themes" such as technology, regulation and climate change.

The fund's "tilting strategy" - altering exposure to certain asset classes to take advantage of market conditions - continued to be a source of active investment returns, he said.

"Periods of market volatility, such as we saw in early 2016, provide opportunities for tilting."

Meanwhile, the Super Fund still views the dairy industry as having solid long-term potential, despite the financial pressure it is facing as a result of the commodity slump.

It recently purchased two New Zealand farms, both of them in Canterbury, taking the total number of properties in its portfolio to 14.

The Super Fund returned 1.3 per cent in the year to May 31 and has delivered returns of 9.5 per cent per annum since its inception.

"Long-term, we expect the fund will generate an average return of 8 to 9 per cent [per annum]," Winn said.