NZ Super Fund value drops $3.3 billion in a year, but it could have been worse

New Zealand Superannuation Fund chief executive Matt Whineray. Photo / Jason Oxenham.

The value of the New Zealand Superannuation Fund dropped $3.3 billion to $55.7b in the year to June 30 as sharemarkets around the world tumbled amid rising inflation and recession fears.

The 6.99 per cent fall was the third time in the fund's history that it has had a negative annual return.

Its worst ever year was 2009, when it went backwards by 22.14 per cent during the global financial crisis.

That saw the fund's value drop from $14.128b to $13.352b. But its larger size now makes for a bigger dollar-value drop.

Matt Whineray, chief executive of the NZ Super Fund, said the fund's active investment strategies had cushioned it against an even bigger fall.

The Super Fund compares its returns to a passively invested reference portfolio which has 80 per cent invested in equities and 20 per cent in fixed income.

The passive portfolio makes up around 60 per cent of the fund and that part of its portfolio saw a negative return of 14.24 per cent.

"That was driven by quite significantly negative returns in global equities and New Zealand equities. But also negative returns in global fixed income.

"Often in an equity market fall you might see bonds rally. That didn't happen this year so all of the reference portfolio components fell and that is what contributed to the -14 per cent."

Whineray said through the first half of the year the fund was up around 4 per cent in the six months to December.

"Then you saw a really significant fall off in markets in the second half of the year and in particular the last quarter."

He said the sharp drop in the last quarter - the three months to June 30 - was caused by inflation and markets getting spooked by central banks' response to inflation.

"That was the backdrop of the markets."

Whineray said what boosted the fund's performance and made it better than the passive reference portfolio was most of its active investment positions providing a positive contribution.

"Often you will get some that do and some that don't but on average over time we have added value over the benchmark, but this year saw almost across-the-board positive contribution from active investment strategies."

The NZ Super Fund's timber investments performed well in its latest financial year. Photo / Alan Gibson.

Strategies like tilting its listed equities investment towards companies that have value - those that are relatively cheaper than other companies, seen as high quality or have momentum, he said.

"In particular the value ones did pretty well and that's not gone well the last couple of years, so it's been a tough strategy for a few years but it really came roaring back this year."

Its timber portfolio also did well, particularly its stake in the Kaingaroa Timberlands - a radiata pine forest in the central North Island.

The active investment saw it beat its passive reference portfolio benchmark by 7.25 per cent earning $4.5b in value add and bringing the total return to -6.99 per cent.

Bounce-back

Since the end of June the fund has regained around $2b.

Whineray said the markets started to rally almost immediately after the end of June.

"They have bounced back although in the last few weeks they have come off again.

"We see this continued volatility. Markets are very reactive to new bits of economic data, particularly around inflation and interest rates, and they were rallying through July and half of August, and since the middle of August they have backed quite off a bit too."

The annual performance doesn't reflect the sale of its investment in Kiwi Group Holdings - the parent of Kiwibank.

Last month the Government said it would take direct ownership of KGH. The NZ Super Fund, which owned 25 per cent, will receive $527 million from the deal.

Whineray said the money from the sale would be reinvested back into the reference portfolio and go into global bonds, global equities and NZ equities.

"As we find other investments we will fund them out of that pool. We will stay invested the whole time in a broadly growth-orientated portfolio but that will just transition from being unlisted in the form of Kiwibank to listed in the form of other equities."

The outlook

Whineray said markets were likely to remain volatile.

"It is very uncertain because everyone is looking at this tension between what inflation is doing and what the central bank response is because as central banks raise interest rates that reduces corporate profits and it reduces demand.

"Ultimately what they are trying to do is reduce demand to reduce inflation and at the same time it is also increasing the discount rates so it means equities, or those future cashflows, are being discounted at higher interest rates so they are going to be lower."

He said markets were being really reactive at the moment.

"Markets are going to flop around a lot. We are going to see that for a while as people try to figure out what is the long-term direction here - is it a low-growth, high-inflation environment or do central banks get on top of it which means there is low growth and low inflation? Everyone is trying to figure out what that combination looks like."

Whineray said it planned to ride out the uncertainty by being as resilient as possible.

"We want to set ourselves up to be resilient to different environments because we are not here to try and pick that future environment - that is beyond investors. But what we are trying to do is be resilient."

That meant the fund would maintain plenty of liquidity so it could respond to opportunities when they came up while also using its tilting strategy to take advantage of the bouncing around of markets.

"With a very equity-oriented portfolio we are going to show negative returns. So want to make sure people understand that. The reason we have got that equity-orientated portfolio is because we have got a long-term view that that is going to pay off for the country and it has in the 20 years since we have started."

The fund has averaged 9.65 per cent per year since its inception in 2001.