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NZ Super takes alternative view of alternatives

In its latest strategic asset allocation (SAA) statement the New Zealand Superannuation Fund has reinforced its tilt towards long-term growth assets with private markets, in particular, slated to form a more significant part of its portfolio.

Friday, January 11th 2008, 8:49AM

by David Chaplin

The updated SAA, released on December 21, followed on from earlier statements issued in 2003 and 2005, which chart the progress of the $14 billion plus fund towards high growth and alternative investments.

According to the statement issued by the Guardians of New Zealand Superannuation, the Fund would now target a 20% allocation to alternative assets (which includes timber, infrastructure and private equity) compared to the 6% set aside for the sector in the 2005 review. However, the Fund has also instituted a new method of assessing its exposure to private markets through the use of public market 'proxies' and has set a flexible target allocation to the asset class of 10-30%.

"We also believe that private market exposures are best assessed bottom up (on a case-by-case basis, at a much less aggregated level than an asset class as a whole). The Fund neither wants to pass up attractive opportunities, nor accept inferior investments just to meet SAA targets," the latest statement from the Guardians of New Zealand Super said.

"Our preferred approach is to define the SAA with appropriate ranges, within which substitution between public and private market asset classes can take place depending on the availability of suitable private market assets. Using public market exposures to proxy private market exposures gives us a mechanism for making sure the risk profile of the Fund remains broadly unchanged as exposure to private markets changes through time."

The newest SAA also included target allocations of: global large-cap equities 32%; global small-cap equities 5.5%: emerging market equities 3%; NZ equities 7.5%; fixed interest 17%; and, property 10%.

The Fund has also set aside commodities as a separate asset class for the first time, allocating 5% to the sector.

While the Fund's allocation to NZ and emerging markets equities has remain unchanged, as at March 2005 its SAA was: global large cap equities 48%; global small cap equities 8.5%; alternative assets 7%; property 6%; and, fixed interest 20%.

The NZ Super Fund has returned almost 14.3% per annum since inception, compared to the risk-free rate of return of 6.57%, however, its CEO, Adrian Orr, warned such levels of continued outperformance should not be expected.

Orr said there was a 75% chance of experiencing a three-year period of negative returns during the next 30 years while annual volatility in returns are expected to be about 10%.

"This caution has been borne out over recent months, with the end of the global golden investment weather," he said.

"While our short-term investment returns remain within our anticipated variability, they demonstrate why the Guardians continue to focus on diversification and its long-term objectives. The Strategic Asset Allocation review is a key guide to these activities."

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