NZ Super Fund's investments in NZ drop despite ministerial directive

Chief investment officer Matt Whineray. Photo / Greg Bowker

The New Zealand Superannuation Fund has reduced the portion of the fund invested in New Zealand to 14.79 per cent of its value from 21.3 per cent in 2009 despite a ministerial directive to eventually increase the allocation to 40 per cent.

The sovereign wealth fund's annual report shows its exposure to New Zealand is 12.6 per cent as at June 30, 2016, compared to 13.5 per cent in 2015 and 13.8 per cent the prior year. The figure rises to 14.79 per cent when based on a proportional calculation of the value of its investments in the financial statements and including holdings in rural and forest land.

The fund said the proportional drop since 2009 reflects the strong performance of global equities in recent years and that it has taken advantage of favourable market conditions in New Zealand to make a profit on some of its local investments, such as its holding in Z Energy.

Last month the Super Fund said it was setting up an investment hub to discuss investment opportunities, particularly in infrastructure, that it can create with New Zealand partners such iwi and where it has a home-town advantage. The fund partnered with Ngai Tahu and New Ground Capital late last year on a $113 million new housing development, its first foray in the Auckland housing market that will see 208 new homes built by late 2018. The development includes three to five-year residential tenancy agreements, which are a first for the country.

In May 2009 Finance Minister Bill English directed the fund's Guardians to identify ways to increase the allocation of New Zealand assets in the fund, eventually aiming at a target of 40 per cent, while still investing on a "prudent, commercial basis".

That year the government also stopped making contributions to the fund after putting in $14.8 billion between 2003 and 2009. Guardians chair Catherine Savage noted in the annual report that if contributions had not been suspended, the $30.1b fund would now be worth an estimated $50b.

Contributions are due to resume once Crown net debt is 20 per cent of GDP, which on current forecasts will be in 2020/21. The fund was set up 13 years ago to help meet future pension needs for an ageing population and the government is expected to start drawing down money in 2032.

The Super Fund reported a reduced return of 1.89 per cent for the year ended June 30, dragged down by negative returns from global equities. That compares to a 14.6 per cent return the previous year and 9.44 per cent since inception.

Chief investment officer Matt Whineray said the fund's high proportion of growth assets, which comprise 80 per cent of its investment portfolio, creates significant volatility. In the last five years, returns from the reference portfolio have ranged from negative 0.23 per cent to 19.47 per cent.

"We expect that there will be years where the returns are poor or negative - and sometimes several in a row," he said. "We take this risk because we expect that, over the long term, we will be rewarded by way of returns that exceed what we could achieve by holding a portfolio of bonds, or by simply putting the money in the bank on term deposit."

The annual report shows the fund has invested a further US$30m this year in US-based View Inc, a manufacturer of intelligent glass systems for commercial buildings. It first invested US$75m in the Silicon Valley-based company last year and since then View has expanded its manufacturing operations and is developing a growing pipeline of projects.

The fund's stake is part of a broader strategy to invest in expansion capital - investments at the intersection of venture capital and private equity which have a higher risk-return profile.

Expansion capital investments account for around 1.5 per cent of the overall fund and are managed by an in-house team and external managers. The portfolio includes $86m currently invested in small and medium-sized New Zealand companies.

Also disclosed in the annual report is the chief executive's remuneration. Adrian Orr earned $1,025,121 in the latest year including bonuses of $334,799, compared to $830,925 the previous year.