Fund eyes investing in rural projects

Chief executive Adrian Orr says the super fund will invest if if means adding value to the quality of the portfolio. Photo / Steven McNicholl

The New Zealand Superannuation Fund is considering investing in rural land, state-owned enterprises and large infrastructure projects but will not guarantee increasing its stake in New Zealand.

The fund, which was set up in 2003 to help pre-fund the cost of superannuation, yesterday released its first annual report since receiving a mandate from the Government to increase its investment in New Zealand.

One of National's pledges in the lead-up to the election was to ensure the fund boosted its investment in New Zealand to 40 per cent.

But a mixed reaction from the investment community and advice from the guardians of the super fund that it could distort the local market prompted the Government to water-down its request.

In May, the fund received a directive from Finance Minister Bill English requesting that "opportunities that would enable the guardians to increase the allocation of New Zealand assets in the fund ... be appropriately identified and considered by the guardians".

Yesterday, the fund revealed it had reviewed 23 opportunities, had invested $150 million and committed to investing $273 million in New Zealand since being given the directive.

However, its investment in New Zealand remained fairly static at 23.8 per cent, including 5.4 per cent cash.

Chief executive Adrian Orr said the fund was looking at opportunities to provide expansion capital to small and medium-sized growing businesses but would not do so without finding the right manager.

It was also reviewing the merits of investing in rural land, both domestically and internationally.

"We have met with numerous prospective New Zealand fund managers looking to raise capital to invest in this area. We expect to complete our review ... in the next few months."

The fund was also recruiting new staff to work in its private markets team to consider more direct investment in New Zealand.

However, Orr said the fund would invest only if it believed it was adding to the quality of the portfolio and could not guarantee it would increase its investment in New Zealand at all.

"Given the unpredictable nature of future commercial, prudent, investment opportunities, we are unable to offer an assurance as to how much, if at all, the fund's New Zealand assets will increase."

Meanwhile, guardians' chairman David May said the fund, like others, had failed to predict the "contagious effect" of the global financial crisis on its assets.

Although performance figures were released last month, the report reveals the extent of the damage of the crisis on the fund, which made a pre-tax loss of $3.2 billion in the year to June 30 after a 22.1 per cent drop in returns.

May said it had been a tough year for the fund with the 2008/09 results "erasing" gains made in its first five years.

The super fund's annual return on investment since launch dropped to 3.8 per cent, well below the 6.6 per cent per that could have been achieved if the money had been invested in Government treasury bills. But May said that, unlike most investors, the fund had an extremely long time horizon and the ability to withstand more volatility in its returns.

"Our investment strategy ... has been designed with these characteristics in mind."

May said the crisis had tested the fund's tolerance for volatility but he believed it should continue to stay on the same path.

"Now is the time we must retain our discipline to stay the course, retain our focus on the long term and capitalise on our ability to ride out tough patches without selling undervalued assets."

May said the fund, like others, had failed to predict the impact that the crisis would have on economic growth and real assets.

"Our assessment at the time was that markets were not significantly overvalued and that over the long term, investment in growth assets would continue to provide superior risk-adjusted returns."

May said the fund had decided not to try and outguess the markets to predict short-term movements and had focused on managing and diversifying its risks instead.

As a result, the fund had experienced a significant rebound in returns since March 2009. It stood at $13.6 billion at the end of June but had risen to $15.18 billion as of September 23.

NZ SUPER FUND
Results for year to June 30
* Return on investment-22.1 per cent
* Pre-tax loss$3.2 billion
* Fund size$13.3b(excluding provision for tax)