Expect lower returns

The fund, which was established to help pay some of the future costs of state pensions, currently is around $9 billion in size.

It has generated returns of 15.33% annually since September 2003. Its long-term return objective is to exceed, before New Zealand tax, the risk free rate of return by at least 2.5% annually over rolling 20-year periods.

However currently it is generating returns of 9.26% annually above the risk free rate. “In a sense that should make us very worried,” Dyer says. While the perception is that the returns have come from a clever investment strategy that has managed to generate a lot of alpha or excess returns that is not the case.

Dyer says the bulk of the returns have come from market performance as opposed to value-added strategies.

He also said the investment strategy still has a long way to develop and a lot of areas such as property and fixed income are a little under developed.

For instance fixed income had been “de-prioritised to date” as it has slim margins. With the recent appointment of Tore Hayward to the investment team this area will begin to move forward faster.

Dyer says investment markets are moving into a “low return world” for a variety of reasons.

Consequently the fund has lowered its long-term return projections from 9% a year to 8.65% for the next decade.

He said a case could be made for even lower return projections.

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