After a tumultuous 2020, The Guardians of the New Zealand Superannuation Fund (the Guardians) have decided to make next to no changes to their reference portfolio following a white paper review.
The reference portfolio is the basis on which the majority of the fund is invested, and represents the single biggest driver of returns. It is designed to gain broad, low cost access to listed global investment markets, in order to maximise returns without undue risk.
The portfolio has served as the NZ Super Fund's benchmark for active investment since its adoption in 2010. It is an alternative portfolio to the actual portfolio the fund invests in and is designed with the fund's objective and mandate in mind.
Stephen Gilmore, chief investment officer at NZ Super told Good Returns, "It’s a sign of confidence that the reference portfolio’s risk profile, risk and return being the two most important characteristics of any investment portfolio, matches the long-term objective of the fund. While 2020 may have been tumultuous, we don’t think in terms of individual years when making decisions on the reference portfolio. From the perspective of long-term investors like the Guardians, it’s the long-run risk and return characteristics that are of most relevance."
"The board endorsed this decision in the 2020 review, on the basis that the fund’s long-run investment horizon gives us greater tolerance to hold on through market fluctuations and reap rewards over the long-term – without taking undue risk to the fund as a whole."
Gilmore stated that the white paper review "largely reflects the fact that we are confident in our long-term assumptions for the fund. I can say that carrying out the review in 2020 meant grappling with more uncertainty than usual, particularly around the very low interest rate levels. As a result of the review, our assumptions around long-term interest rates came down by 0.5%."
Other points of the review saw the portfolio’s strong weighting towards growth assets, retaining an 80% allocation to growth assets (equities) and 20% to fixed income assets (bonds).
An existing 5% allocation to listed New Zealand equities also remains unchanged. There has been a minor change to the structuring of the global equities exposure within the portfolio.
Over the long-term the Guardians expect that the portfolio will return 6.8%, 2.8% above the estimated risk free (Treasury Bill) interest rate, a proxy for the cost to the Government to contribute to the fund.
Gilmore is assured that the path that the Guardians have set themselves in this update to their reference portfolio is the right one.
"When you’re operating under conditions of extreme uncertainty, you have to have faith in the steps that lead you to the decision that you ultimately make. When we shifted to a reference portfolio approach in 2010, we put robust governance arrangements in place to support our decision-making processes around the reference portfolio. It’s this belief in the strength of our governance at the Guardians that allows us to feel confident in the decisions we make over the course of each reference portfolio review."
The next review of the portfolio will be in 2025.
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