Government super fund achieves solid return

Basil Logan

The Government Superannuation fund has made an after-tax surplus of $462 million in the June year, exceeding expectations, according to fund chairman Basil Logan.

That represents a 13.5 per cent return on assets which grew from $3.52 billion to $3.79 billion.

The fund, which invests pension funds for government employees as distinct from the New Zealand Superannuation Fund, known as the Cullen Fund, has been closed to new members since the early 1990s.

The fund said it had exceeded its own investment performance measure by 7.6 percentage points. However, the return was well below the Cullen Fund's 19.2 per cent return.

Chairman of the Government Super Fund Authority Basil Logan said the fund had exceeded its target over the last three years by an average of 4.5 percentage points.

The target is based on the after-tax return of government bonds plus 2.5 percentage points per annum measured over rolling 10-year periods.

Mr Logan said this year's result bettered the median average after-tax return of 12.4 per cent in the Mercer Investment Performance Survey, which covers 68 standalone New Zealand private pension schemes.

The best performing asset classes had been international equities, which returned a gross 20.7 per cent (9.1 per cent in 2005), and property, 27.7 per cent (11.8 per cent in 2005).

Both fixed interest classes performed below their long-term averages, with New Zealand fixed interest earning 5.2 per cent (7.8 per cent in 2005) and international fixed interest 2.9 per cent (12.3 per cent in 2005).

Mr Logan said there was a likelihood that investment returns for equities and property would move back to historical average levels and for that reason the fund was considering investing in "alternative asset classes" and moving towards a greater degree of active management for the existing asset classes.

The authority had made a decision in principle to allocate up to 15 per cent of the assets of the fund to alternative assets, in addition to the existing 7.5 per cent allocation to property.

The fund had already allocated 3 per cent of its assets to collateralised commodity futures. This involves a swap arrangement with international bankers Goldman Sachs, which will pay a return based on an international commodities index tracking such things as wheat, energy, and pork bellies.

The fund's exposure to the futures index is not leveraged, so its exposure, should the index performance turn sour, is limited to cash, rather than unlimited losses than can occur with some futures contracts.

The fund has reduced its investment in fixed interest assets.

The next area of alternative assets the fund is looking into is hedge funds, via a fund of hedge funds.

It is also considering investing in high yield credit, although not in New Zealand. The fund currently has limits on what bonds it can invest in, depending on their credit rating.

It will look at investing more in emerging market and corporate debt bonds.

Investing in the vogue investment class of private equity, as the Cullen Fund is considering, was not a high priority, fund chief executive Alan Langford said.

The aim of investing in alternative assets was to find assets that performed differently to its current asset class range.

The fund was looking for better returns at the current level of risk, or to achieve a similar return with lower risk, Mr Langford said.

- NZPA