Since Covid and that early market pullback, the fund has had its fastest-ever period of growth. Photo / Getty Images
A recent NZ Herald headline, "Government learns not to check KiwiSaver after Super Fund down $2.2 billion on forecasts", captures the reality of recent events on global markets very well.
Many of us have opened our KiwiSaver accounts to see large losses as stock and bond markets have retreated this year. The "Government's KiwiSaver account" is no different; from a peak of $61.1b in December 2021, the NZ Super Fund is now worth $57.5b (after receiving net contributions of $12.1b from Government since its inception).
And just like individual savers, as long as you're not looking to get your money out in the near future, it pays not to worry too much about short-term market moves, especially as forward-looking returns will now be higher than they were.
The NZ Super Fund takes a long term view. It was established in order for Government to put money aside now in order to help pay increasing costs of superannuation in the future. Payments back to Government start in the early 2030s, meaning we have a long time horizon, and the ability to look through market ups-and-downs.
This isn't to say that the fund (or ordinary investors) shouldn't take stock and consider our portfolio structure, or re-examine the underlying assumptions that make up our investment strategy and risk profile. To do that, it is worth recalling recent events.
The period since Covid-19's arrival has been unusual. An initial severe market drop was followed by a rapid recovery as governments and central banks loosened policy to support their economies. One of the consequences of that support was that asset values rallied strongly, from property to shares to crypto.
Since Covid and that early market pull back, the fund has had its fastest-ever period of growth — up 30 per cent in the year to 30 June 2021. In fact, over the last six years, the NZ Super Fund has been the world's top performing sovereign wealth fund. But when stock markets fall, as we have seen this calendar year, fund performance is impacted.
Two years ago in this supplement, I wrote "the world faces a difficult period unwinding all the cash and other support that has been provided to the system", and that we faced three potential paths ahead: a crash, sustained growth, or a period of unanticipated inflation. It seems we are firmly on the latter path.
The global inflation track and its impact on interest rates and economic growth are now the main topics of conversation for investment professionals, economists, central banks and governments around the world. How high will inflation go? How long will it last? Will the resultant tightening of monetary policy result in a hard or soft landing? How should policymakers balance growth considerations with bringing inflation back to target?
These are questions the world hasn't faced for decades.
While there have been ups-and-downs, general economic conditions have been characterised by declining real interest rates and low inflation, driven by accommodative monetary policy, increasing globalisation and technological advancement.
In the past, when seeking to overcome economic headwinds and stimulate demand, central banks have cut rates and printed money while governments have loosened fiscal policy without having to worry about inflationary pressures. Those tools are no longer on the table, or at least they are greatly constrained, with asset prices pumped up by previous policy settings, government balance sheets already stretched and inflation running hot.
Further, central banks are not well placed to deal with the supply shocks stoking inflation; they cannot fill the energy gap caused by Russia's war in Ukraine and they cannot fix the supply chain interruptions caused by Covid-19.
These are not excuses. To maintain credibility, however, central banks need to dampen aggregate demand by raising interest rates, least inflation becomes entrenched.
More pain now likely means less pain in the future.
The obvious impact of inflation is increasing prices for everyday items, but it has a less apparent impact — it potentially dries up future investment by pushing up the cost of capital for businesses if the after-inflation costs of financing rise.
As equities and bonds sell off and become cheaper, their expected future returns rise. That means that the expected return required to justify alternative investments also goes up. So not only have the costs of funding risen — so too have input costs, from concrete to semi-conductors, making new projects and initiatives less viable.
Through all that, our focus is still on seeking out investment opportunities for the fund.
As borders have reopened, our staff have taken the opportunity to travel and meet with investment managers, investee companies and peer funds in a host of different countries.
With 85 per cent of the fund invested offshore, it's essential for us to remain in touch with the world. I've recently returned from Europe, where similar questions about the global outlook are being asked. I was also struck by a greater focus on sustainability than what you encounter in New Zealand, and a firm determination to progress the energy transition (spurred on by Russia's actions).
It was also apparent that New Zealand is not alone in fretting about its economic challenges. Eurozone inflation came in at 8.1 per cent last month, but the European Central Bank has so far been relatively dovish in response, thanks in part to concerns of "fragmentation", with borrowing costs in some member countries rising materially relative to others.
The Bank of England started raising rates earlier and has warned inflation is expected to peak above 11 per cent later this year. And after belatedly accepting that inflation wasn't transitory, the US Federal Reserve began hiking rates, most recently by 75 basis points — its most aggressive move since 1994.
Meanwhile, markets are pricing in more to come, while longer dated bond yields are also down from their highs as market participants are assigning more weight to the downshift in global growth prospects.
The thing we shouldn't do is panic (same goes for KiwiSavers).
In fact, as a counter-cyclical investor we have the ability to lean into periods of market volatility. The fund can pick up assets when they become under-priced and make a return for taking on that risk when markets eventually recover. Overall, our active investment strategies have outperformed, meaning we've materially lessened the portfolio draw down than if we'd simply been tracking the market.
Our focus on the long-term means that, since inception, the fund has returned approximately 10 per cent per annum (before tax and after costs). Looking ahead, Treasury expects the fund to almost double in size to $100b by the end of this decade, and be worth more than $1 trillion in the 2080s.
Given that time horizon, changing tack in response to a market drop (or when it's rising) is a fool's errand. Examining your underlying assumptions, however, isn't.
Appropriate asset allocations to achieve our long-term goal to maximise returns without undue risk to the fund as a whole is our key investment decision.
Those allocations are driven by a long-term view of real interest rates.
The key question for investors, therefore, is how far central banks need to go to retain or regain their credibility, and whether that means bringing inflation back down to the levels consistent with previous targets, or whether something a bit higher will suffice.
Understanding that dynamic is far more important than checking in on a day-to-day balance.
• Stephen Gilmore is chief investment officer of the NZ Super Fund.
The supermarket said its staff caused her public embarrassment and distress.