Super plan gets icy response

Super Fund chief executive Adrian Orr.

The Guardians of the New Zealand Superannuation, or "Cullen" Fund, have responded with a cool tone to Prime Minister John Key's proposal to direct the fund to allocate 40 per cent of its cash to domestic investments.

In a December briefing to finance minister Bill English, obtained by current affairs website Pundit.co.nz, the guardians indicate there would be significant challenges in finding sufficient quantity of suitable investments to meet the target.

They point out the fund's allocation, at around $2.2 billion or 18 per cent of assets, already represented a significant "home country bias".

To increase the allocation to 40 per cent by 2018 would mean lifting the dollar sum invested from the $2.2 billion to ten times that much, equal to a compound annual growth rate of 26 per cent.

While the guardians acknowledge there are some "good reasons" behind a home bias in investment, "there are also some practical limits".

"These include the investment opportunities, the depth of markets, impact on market pricing, and asset and country concentration risks that must be managed or compensated for."

The section of the document dealing with practical limits to the fund's investment in listed equities was blacked out, but the fund, which owns 2.6 per cent of shares in companies that make up the NZX50, has in the past pointed out that too much home equity market bias could distort prices on the local market.

On private equity the fund notes that "it seems unlikely that there will be sufficient flow of attractive transactions to make more than a very modest difference to the fund's allocation".

The guardians are also downbeat on the prospects for further suitable property and forestry investments.

And they say infrastructure investments, which Key has signalled may be an area of focus for his Government, were "currently the most difficult asset class to access in New Zealand due to a lack of opportunities".

"To bolster our investment in this area significant new opportunities and potential asset classes would need to be made available."

On risk management implications of the 40 per cent policy, the fund pointed out that if it was able to find sufficient domestic investment opportunities, it "would still be exposed to geography, asset type, and single asset concentration and exit risks".