Macquarie economists argue that the NZ Superannuation Fund has a strong home market bias, and that will hold back its performance.
Friday, August 15th 2003, 11:55AM
Event
The NZ Superannuation Fund has announced its asset allocation model and will commence investing at the end of September 2003.
Impact
A home bias is evident, as 7.5% of the fund will be invested in NZ equities which account for only 0.1% of the MSCI world index. NZ equities have under-performed most other major markets over the long-term, so this strategy could make achieving its 8.0% nominal annual return target a little more challenging.
Analysis
The Guardians of New Zealand Superannuation (GNZSF) have announced its broad asset allocation as follows:
Asset class
% of fund
NZ$ m invested in first year*
NZ$ bln invested by 2023
Total
investment
100
2,400
101
NZ listed
equities
7.5
180
7.6
NZ other
growth assets
4.5
108
4.5
Total NZ
invested
22.0
528
22.2
Int’l listed
equities:
Large/mid cap
44.5
1,068
44.9
Small cap
12.0
288
12.1
Emerging markets
3.0
72
3.0
Int’l other
growth assets
8.5
204
8.6
Int’l fixed
interest
10.0
240
10.1
Total int’l
invested
78.0
1,872
78.7
*Assuming asset allocation is set from day 1. Source: NZSF
Effectively, the Fund™s main performance target is to exceed, before tax, the Official Cash Rate (OCR) by 2.5% per annum. Since its introduction, the OCR has averaged 5.5%. Therefore, as a guide, the GNZSF aims to achieve a nominal return of 8.0% per annum.
The GNZSF have elected to invest 22% of the Fund in New Zealand assets including equities, fixed interest, the property market, private equity and other growth assets.
While the GNZSF have defended the decision not to invest an even higher amount in NZ equities, 7.5% of the Fund will flow to that market, representing a strong home bias because NZ is only 0.1% of the MSCI world index.
Over the past 15 years, NZ equities have under- performed most other markets (see chart previous page), so the GNZSF should really be defending its overweight NZ equities position, a strategy that could make it harder to achieve its target over its 20-year time horizon.
The GNZSF will commence investing the fund from September 2003, with around NZ$2.4b to be allocated. This means an initial investment of NZ$528m in NZ assets and NZ$180m in NZ equities, equivalent to 0.4% of the current NZX market capitalisation.
Over time, the relatively large size of Fund inflows may have a significant impact on the NZ equities, fixed interest and currency markets. The latter will be impacted because, at this stage, 60% of foreign currency exposure in growth assets and 100% of the international fixed interest portfolio will be hedged.
Future government contributions are planned to be NZ$2 billion annually.
Investment managers with a range of styles
•A number of managers will be appointed for initial portfolio construction:
Asset class Managers
NZ equities
4
Intl equities
Large/mid
cap
3
Nth
American + European small cap
3
Emerging
markets
1
NZ fixed interest
NZ
Government bonds, passive
1
NZ
credit, active
1
Cash
1
Int’l fixed interest
Global
sovereign bonds, passive
1
Global
credit, active
2
Property and illiquid
assets
Tba
Source:
NZSF
Planning for an ageing population
The NZ Superannuation Fund was created by the Government to build a pool of savings that will help to smooth the taxpayer burden of providing for an ageing population. Without the Fund, the cost to taxpayers of providing superannuation to retired New Zealanders would more than double by 2050.
To prepare for this, the Government is allocating around 2% of annual GDP (NZ$2bn in current terms) to the Fund over 20 years.
The Fund has a long-term horizon because no draw- downs are allowed until 2020. Compounding investment returns will allow the Fund to continue growing past this point.
