Bid for slice of Super cake

By ELLEN READ

On the eve of the decision on how the New Zealand Superannuation Fund (NZSF) will be invested, stock exchange boss Mark Weldon is making a last pitch for this country's listed companies to get a greater share than is normal for local fund managers.

The fund will start investing by the end of September. Its $2.4 billion pool is expected to grow to about $150 billion in 30 years.

Weldon has released a stock exchange paper, Investing In New Zealand, arguing that investing locally is not just good for the exchange but also economically rational - a change from the advice and evidence often given by overseas advisers.

"The fund guardians have a tremendously important asset allocation to make and we needed to present the other side of the coin," Weldon said.

Aimed initially at the fund guardians - who meet on Monday to discuss asset allocation - the paper's findings stand for all fund managers, Weldon said.

"They have an obligation to ask themselves what are the theoretical underpinnings of the decisions they're making."

Weldon has been lobbying the fund to put up to 30 per cent of its money into local shares, rather than the 15 per cent typical of local fund managers.

Among the reasons the exchange paper gives to support this are:

* The benefits of diversification are overstated. The exchange says that over the past three decades global markets have become more correlated, meaning markets now tend to move up and down together more than they did in the past, and that trend is expected to continue. That means the advantages of diversifying have "largely evaporated".

* While diversification is meant to ease the pain of bear markets, global markets are most correlated when they are heading down. The exchange says that means "diversification fails international investors when they need it most".

* Although modern portfolio theory suggests investors should diversify across international markets, many studies have found that sophisticated international investors don't actually do that.

It seems unlikely that those big international investors have been getting it wrong for 30 years by emphasising investments in their own home markets.

* Given that the fund will probably be worth over $150 billion in 20 years' time, hedging against currency movements will become very difficult. The fund will become so big that it will make up most of the market and there won't be enough other parties in the foreign currency market.

* Despite globalisation, investing at home allows fund managers to exploit local knowledge. The exchange cites figures to show that overseas managers do better with their local investments than they do when they venture abroad.

At Monday's meeting, the fund guardians will consider the exchange paper together with reports from advisers Mercer Investment Consulting and Frank Russell.

"The stock exchange has indicated this view earlier. We are familiar with it," said fund chief executive Paul Costello. "We will review it as we review a whole range of views."

He added the board's aim was to maximise returns without taking undue risks.