Capital Markets Report: Super Fund law change reflects global best practice - Will Goodwin

Will Goodwin, head of direct investments at the New Zealand Super Fund.

Will Goodwin is Head of Direct Investments at the New Zealand Super Fund.

OPINION

With 21 being the age traditionally regarded as marking the move into adulthood, it is appropriate that 21 years since the Guardians of New Zealand Superannuation made its first investment on behalf of the New Zealand Super Fund, a law change will let the Super Fund take a controlling interest in an investee company.

The initial prohibition against the fund holding a controlling interest in any entity was due in part to some uncertainty at the fund’s inception about how it might invest in practice.

Would stakeholders believe a company majority-owned by the fund had an implicit government guarantee? Would the Guardians’ operational independence be compromised by political pressure to undertake investments that may not stack up on a purely commercial basis?

The intervening period has proved the value of the unambiguous mandate set out in our founding legislation.

By law, the Guardians must invest the fund on a prudent commercial basis consistent with best-practice portfolio management, maximising returns without undue risk to the portfolio as a whole while avoiding prejudice to New Zealand’s reputation as a responsible member of the world community.

We also have a governance structure that ensures that, while we are ultimately accountable to the Government, we have complete freedom to make our own investment decisions.

That governance structure and our operational independence are two of our key competitive advantages, or endowments as we refer to them, that have driven the performance of the fund and made us one of the top-performing Sovereign Wealth Funds globally, delivering an average annual return of 9.97 per cent since our inception.

At the time the fund was formed, direct investments made up a relatively small part of the typical sovereign wealth fund’s portfolio. Our 2003 Annual Report shows we were then targeting a portfolio made up of 67 per cent listed equities, 13 per cent “other” growth assets and 20 per cent fixed income assets.

Compare that with our portfolio composition 20 years later: last year’s Annual Report shows listed equities made up 47 per cent of our portfolio, while alternative investments, including infrastructure, real estate and forestry, and private equity, accounted for 27 per cent.

Many of these investments are made through external managers; however, direct investments now make up about 10 per cent of our $75 billion portfolio. This reflects the fund’s growth and the Guardians’ correspondingly greater in-house capability.

It is also in line with international trends. In a report based on a 2023 survey of 85 sovereign wealth funds and 57 central banks, US investment management company Invesco commented that “despite varying market conditions, sovereign wealth funds consistently increased allocations to real estate, infrastructure, and private equity”.

In today’s environment, best-practice portfolio management for sovereign wealth funds means a role for direct investments.

For the Guardians, direct investments allow us to capitalise on another of our endowments: our long investment horizon.

With no immediate liabilities, and Treasury currently forecasting the first withdrawals from the Fund are still a decade away, we can invest in relatively illiquid assets that provide strong risk-adjusted returns over a long period.

With the flexibility the new law affords us, we now have a broader set of investment opportunities and can make the decision that best serves the fund’s long-term interest.

Our mandate, however, remains unchanged.

We will continue to implement active investment strategies only if they have a better expected risk-adjusted return than our passive portfolio. We will continue to access these investments via external managers and co-investment arrangements, as well as through direct investment.

And for most large investments, a partnership with other entities will remain our preferred model. This is both a way to maintain a balanced and diverse portfolio and a way to join forces with others who provide complementary skills.

Our partnership with Copenhagen Infrastructure Partners, which is currently exploring the feasibility of developing an offshore wind farm in the South Taranaki Bight, is one example of this model in action.

The option to take a controlling interest in an investee company is a useful addition to our toolbox and an opportunity for us to more fully exploit our competitive advantages, including our knowledge and understanding of our home market.