The NZX published a paper earlier this year arguing that at least 20% of the funds many billions of dollars should be invested in the local market.
It presented 10 arguments supporting its case.
However, Victoria University associate professor Martin Lally has reviewed the NZX paper and discounted all of its arguments.
“None of these arguments provides a clear justification for tilting away from the world market portfolio in favour of the New Zealand market, and some even point to the opposite conclusion.”
One argument which could be used to support a tilt towards New Zealand shares was the tax benefits, however that was not presented in the NZX paper.
Lally says that the imputation tax credit regime favours investors in New Zealand shares as opposed to those buying international ones.
“If the NZSF concerns itself with all taxes paid, then a local tilt is justified by the incremental dividend imputation benefits to local over foreign investors coupled with the likelihood that these incremental benefits are not fully priced into New Zealand assets.
“By contrast, if the NZSF concerns itself only with taxes paid to foreign tax authorities, then a local tilt is justified by the fact that the NZSF is tax-exempt on local but not foreign assets.
Lally says depending upon the approach taken a local tilt of up to 15% could be justified. But he warns that if the fund over-allocates to New Zealand shares then there is the prospect asset prices will be driven higher to the disadvantage of the fund.
Another argument is that New Zealand taxpayers “are already too strongly biased locally, might still argue for little or no local tilting.”
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