How to invest a $45 billion fund
In the first of a new series SuperTalk examines the investment issues facing the Guardians of the Big Cullen Fund.
Thursday, May 31st 2001, 12:57PM
Assuming the government gets the numbers to introduce its pre-funding scheme for New Zealand Superannuation one of the big issues will be how to invest the thing.
The fund kicks off this year with a $600 million injection from the Government. Payments will be made into the fund fortnightly from July 1.
Until the fund is established the money will be looked after by Treasury's Debt Management Office which will in all likelihood invest it in cash and fixed interest.
During this initial start up period the fund will struggle to meet its 7% pre-tax assumed rate of return.
The assumed transfers for the subsequent three years are $1.2 billion, $1.8 billion and $2.5 billion respectively.
By 2010 the government will have provided capital contributions of $26.5 billion.
It will be a significant player in the market when compared against the present size of the industry. (At the moment there is about $45 billion invested in the local managed fund industry, and the sharemarket has a market capitalisation of about $45 billion).
Frank Russell managing director Craig Ansley says while the fund is big by New Zealand standards, it's small internationally. He reckons over half of Frank Russell's international clients have funds bigger than what the Government is proposing.
The good thing about the fund, he says, is that it will be big enough to have a decent investment programme.
The question though is how should this money be invested by the fund's Guardians?
Some of the main issues they face are:
- How much of the fund should be invested offshore?
- How much should be put into international shares?
- Should the fund be allowed to invest in New Zealand Government bonds?
- How does it deal with currency exposure?
- How does it implement a socially responsible investment policy?
The first issue of how much of the fund should be invested offshore has already proved to be an early target for the politicians.
Finance minister Michael Cullen has made no pronouncements on the matter, except to say that the Guardians should be allowed to do whatever they deem appropriate.
Meanwhile the Alliance and the Greens are keen to see the bulk of the money used in New Zealand.
Somewhat surprisingly one of the planks of National's attack on the fund has been about exporting capital, a euphemism for investing offshore.
This argument, which National's finance spokesman Bill English regularly highlights, is somewhat strange as it comes across as slightly xenophobic. Additionally National is meant to support globalisation and free trade, which includes capital. (For more see: English airs concerns over pre-funding)
The other interesting argument is what would happen if National had its way? The theory is that instead of putting surpluses into the super fund they would be returned to taxpayers, who would then save the money in their own name.
Assuming this happened it is worth looking how individuals would invest that money.
No matter which set of statistics you look at it is clear that the increasing trend in New Zealand has been for people and funds to increase their exposure to offshore assets.
Therefore if individuals were investing the money, as opposed to the government then they would choose to export the capital too.
While the current trend is clear there is a wide range of views being expressed on this issue already with some saying that the entire fund should be invested in passive offshore equities, while others say the fund should be New Zealand based.
Likewise there is the issue of how much, if any, of the fund should be used to buy NZ Government bonds.
Ansley says this issue is rather circular and is akin to one investing in its own mortgage.
"This would certainly bother me."
He says the public are constantly told to pay off its mortgage before starting to save.
"That's would we should be doing."
Ansley also suggests that the fund is the ultimate defined benefit plan in that its investments (assets) can be matched directly to future liabilities (future state pensions).
Because there is no need for income until the fund starts paying out pensions until 2025 it should all be invested in growth assets.
Another major issue which has surfaced is how will the Guardians deal with the requirement to invest the fund without prejudicing New Zealand's reputation as a responsible member of the world community, in other words how does it include a socially responsible attitude into its mandate.
www.supertalk.co.nzwill be running a series of articles and columns on How to Invest the Fund over the next couple of weeks.
You can take part in this debate too!
You can read Philip's blog here: http://www.goodreturns.co.nz/blog/
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