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Use of statistics questioned

Reader responses to Charles Drace's column: The Super Fund - A fiasco in the making?

Friday, August 22nd 2003, 9:54PM
What concerns me most about Charles Drace’s liberal use of past statistics is that he makes no allowances for the very different financial and economic world we live in today.

From my reading, the principal drivers of previous market crashes were a lack of liquidity, and poor economic policy.

Today's financial markets have the benefits of much improved liquidity (although much maligned, usually in ignorance, the huge growth in derivatives has reduced the liquidity risks previously associated with many markets), and the global connection between economics has never been so great. It is hard to see why previous experiences must be repeated, just because that's how they worked out in the past. At the risk of using another maligned opinion, is it not possible that "it's different this time"?

I also find fault with his generalisation of previous bull and bear market data - he does not inform us of which markets he refers to. If we are today global investors, then the track record of a single market may be irrelevant.

David Gordon CFP
Investment Advice Manager

Guardians get paid if right or wrong
Charles Drace makes a compelling argument based on statistics and hindsight which is hard to ignore and only time will tell whether he or the trustees are right. As a former contributor to the National Provident Fund which gave a guaranteed return of 4%, I used to think it made a lot of sense that the fund provided relatively cheap finance for local authorities to improve roading and other forms of infrastructure.

That feeling existed until I realised that other funds were achieving nearly double that return and thus I quickly exited the scheme when that option became available.

The difference with the "Cullen" scheme is that we don't have individual accounts so we don't have feelings of ownership, therefore few will rely on it to fund their retirement.

I suspect that at the end of the day the fund trustees will get well paid whether they get it wrong or right and the best Charles Drace can hope for, if they don't take his advice, is to say "I told you so", while making good money on alternative investments.

Stu Sutherland

Super money will be spent in New Zealand
I’m not a master of the topic, but here are some impressions to ponder...

A pension fund is all about liability planning.

Hence, if high returns are necessary to meet liabilities, a plan will need to become returns driven, as in the case of the New Zealand Super fund.

Drace argues two points on the strategy of the super fund that targets 78% of offshore investment. He believes this allocation is fundamentally flawed.

Firstly, he believes that the state of the markets is not right and that the bear market in recent times will continue until the P/E ratios are as low as five. This is based on a series of bear/bull market analyses since the beginning of last century.

Firstly, it must be said that to compare the market trends in the 1930s to today, would be equivalent to following the advance in space travel back then, and comparing it to today. So much has happened in the stock markets in the last 20 years that it would be foolish to believe that 100 year old trends would continue.

For example, because of developments in statistical modelling and communication, most large cap companies will control the state of their P/E ratio, depending on how they want to manipulate the movement in the share price (obviously to an extent). Furthermore, large institutional investors, or their portfolio managers will set parameters (ie: P/E ratio) at which they will move upon a share. It is the bilateral understanding of this relationship that enables both parties to have limited control of the stock market.

Furthermore, the rise and fame of hedging strategies are having a profound effect on how the stock market moves. Most of the big international long/short hedge funds are well levered and have the power to move share prices and, in GM strategies, they have been blamed for entire currency shifts (ie: the Asian crisis).

The second point that he makes is that the money should be invested into the infrastructure.

This argument is quite pointless given the pure returns objective of the fund. So what if foreign banks are taking the interest payments from NZ mortgages? The point is that the Super fund will be taking interest payments from people making mortgage payments in Belgium, for example, with probably a lower calculated risk than the foreign banks investing in NZ.

Because the Super fund's policy is to not take an active role in the management of its investments, then it will compete as would any global investor. This is why it would be silly to invest in NZ infrastructure. Why would a pure returns investor put all their money into one basket?

It simply wouldn't. Drace is effectively trying to suggest that the money should be managed as would government spending. I don't think too many of the retired would care for a nicer, cleaner road at the cost of a reduction in pension payout.

Infrastructure is another problem of the government's which, in my own opinion, relates to unnecessary spending.

The upshot is that the Super fund money will be eventually spent in New Zealand by the pensioners, no matter how or where the fund money is allocated. This means the money will eventually make it back into the New Zealand economy, and if invested well overseas, it will be a substantially higher amount than if the money were kept in New Zealand for investment.

R Thompson

I applaud the passions evoked by the initial New Zealand Super Fund (NZSF) investments and revealed by Charles Drace as encouraging evidence, that we are capable of building up the enthusiasm and team spirit not only to accelerate our economic growth rate, but also to become world leaders again by defeating poverty through the democratisation of capitalism, to carry on from where redistributive welfarism begins to fail in deliveries.

So, the NZSF is a huge success in opening up the discussion that has been suppressed and evaded for so long even while being a political issue. Its only 7.5% of domestic investment is quite encouraging in view of the strong (Business Roundtable?) publicity for all of it to be invested offshore on the misleading pretext that maximum profitability is the crucial factor of economic growth acceleration - not a higher savings and (profitable) investment rate - and higher profitability is available offshore.

There isn't even the need to be quite as pessimistic on stock market predictions as Charles, because the worldwide trend of steady and increasing long-term - not speculatively trading - pension fund investments in tangible assets instead of public debt, is likely to reduce share market fluctuations.

Nevertheless, I share his enthusiasm on a rational level for increased NZSF domestic investment because a genuine, unsubsidised return of 5% on capital at home creates more wealth (investment value + 5%) for the country, than 20% on the same capital from abroad (just 20% of investment value).

If the difference in return rates is due to a lower labour cost ingredient for a similar amount of labour in the investment, the domestic investment would generate even more taxable income than the 20% from abroad, fuelling a virtuous circle of increased earnings, tax receipts, (super)savings, and consumption potential.

To ease the doubts of those sceptics expecting all this constructive enthusiasm to collapse under a Muldoonist election bribe " to return all the money to you now, because you alone know best what to do with it" (with enticing ads in the background on how to spend it for pleasure now), I am overjoyed to announce this: The Zone Two meeting of Greypower, covering the area between Warkworth and Counties-Manukau, voted on the 21st of August to recommend for Greypower all over New Zealand to support the NZSF as a permanent institution with substantial investment in New Zealand, and to become practically the guardian of its political sustainability which, of course, can be endangered by any parliament.

If that comes to pass and Greypower does not abuse its political clout potential, political competition between the parties will shift from for or against the NZSF to its most effective administration, and public discussion without the restricting baggage of party ideology will ultimately prevail.

Jens Meder

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