KEY POINTS:
The New Zealand Superannuation Fund has maintained its record of double-digit returns, but chief executive Adrian Orr warned yesterday that the performance was unsustainable.
The "Cullen" Fund grew from $10.1 billion to $13.1 billion in the year ending June from investment returns and Crown contributions of about $2 billion.
The fund is designed to partially provide for the future cost of superannuation. Its return on investment was 14.58 per cent before New Zealand tax.
"So it's been an exceptional performance in large part due to the very benign financial market environment that we have been investing into," Orr said. "Growth has been very strong almost uniformly across all asset groups and geographies."
Since the guardians of the fund began investing in 2003 the annualised return was 14.8 per cent - more than twice the 6.5 per cent risk-free rate of return calculated on the interest on short-term debt issuance paid by the Crown
The fund aimed to deliver at least 2.5 per cent per annum in excess of the risk free rate of return on a rolling 20-year period.
"We are acutely aware that this extended period of positive investment return has been unusual and will not be sustained every year," Orr said.
The fund had made a negative return in only seven out of 45 months since its inception.
"This is incredibly low, probably half of what we would have expected using our analysis when we look forward for investing," Orr said.
The fund was expected to grow to about $109 billion by 2025.
Binu Paul, general manager at investment research and asset consultancy firm FundSource, said retail sector balanced funds had returned on average 7.5 per cent before tax - although fees, which the Superannuation Fund did not pay, could have impacted retail returns by between 1 and 1.5 per cent.
Most balanced retail funds also did not include private markets and commodities within their allocation, Paul said.
Orr said the Superannuation Fund had roughly broken even during the previous three months after the US sub-prime mortgage lending crisis and ensuing credit crunch had hit global markets.
"July was a tough month for global financial markets and then you've seen them climb back out," Orr said. "So it's been one of the dizzy rides that we as a long-term investor can fortunately ride through."
A negative return of 11.43 per cent in the commodities sector - the only category not to show growth last year - was related to the timing, Orr said.
"We are a long-term investor in commodities and that is a very good diversifier for us," he said. "We are a 30-year investment horizon fund, we need to be diversified."
Global large-cap equities totalled $5.6 billion, accounting for 42.3 per cent of the fund, and returned growth of 17.03 per cent last year.
The private markets sector was the third largest at $1.4 billion, returning 25.15 per cent.
The fund was planning to increase the proportion of private market investments, including timber and infrastructure, from 10.8 per cent to 20 per cent during the next three to five years.
The guardians' responsible investment framework had been revised to reflect recent developments, Orr said.
The fund's holding in Total SA - a French oil company with operations in Myanmar - had come in for criticism.
"Total has moved and shifted its practices to be consistent with the United Nations global principals," Orr said.
"In the absence of other international conventions, New Zealand laws, we will be on a watching brief with regard to that investment."
The revision of the responsible investment framework had not impacted on the fund's growth, Orr said.
"We're actually being able to move probably a bit quicker now that we have a well defined framework and criteria through which we can be assessing it."
