KEY POINTS:
It's less than four years since the country's most unusual Crown entity started investing with $2.4 billion of Government money. It received a further $7.7 billion from the state along the way and now has a fund worth at least $13.3 billion.
The entity is the Guardians of New Zealand Superannuation and the fund is the New Zealand Superannuation Fund. It is by far the public sector's greatest performer.
Not only did the fund increase without hiccups along the way but it also notched up an annualised rate of return of 15.3 per cent, 2.3 times the risk-free rate of return (the interest rate on gilt-edged New Zealand Treasury bills).
Even for the statistically challenged, the figures point in one direction only - upward - and there will be more good news to come when the fund releases its annual report next month.
The Guardians of New Zealand Superannuation predicts the fund, already New Zealand's largest, will be around $109 billion in 2025, making it also one of the largest funds in Australasia. Unless the West enters an 18-year depression starting now, chances are the fund will meet its target and be a net contributor to the Government's coffers from 2022 (measured on the basis that tax flowing to the government of the day will exceed government contributions to the fund).
The magic date as far as the fund is concerned is 2028. That's when Government contributions, currently about $2 billion a year, cease and the fund will be expected to meet part of the cost of New Zealand Superannuation (though a government has the power to make capital withdrawals from the fund from 2020). This assumes, of course, that actuarial calculations about New Zealand's ageing population and the corresponding rising cost of New Zealand Superannuation as a share of GDP are correct.
Correct or not, most of the criticism initially heaped on the so-called Cullen Fund - nicknamed after its champion, Finance Minister Michael Cullen - has died away.
Cullen's plan to partially pre-fund New Zealand Superannuation by using ring-fenced Government contributions to build up a pool to meet a future actuarial "bulge" in the proportion of superannuitants to taxpayers isn't looking too bad.
But the fund's guardians have been blessed by sound legislation, the New Zealand Superannuation and Retirement Income Act 2001, which stops a minister of finance meddling in investment decisions. Provided the fund performs to Government expectations, all the guardians are required to do is act prudently and commercially and avoid damaging New Zealand's international standing.
Booming global equities markets for most of the past four years have done the rest and the fund has yet to see a downside.
But such good fortune can't last, according to the new chief executive of the Guardians of New Zealand Superannuation, Adrian Orr.
He took up the job in February, quitting as Reserve Bank deputy governor to replace founding CEO Paul Costello, who left last year to run a huge fund in Australia.
Orr, 44, expects the fund's growth to be lower in the short to medium term, though its return will exceed the risk-free rate of return by at least 2.5 per cent a year over rolling 20-year periods - a bedrock objective of the fund.
"The return we have received has been well in excess of our initial expectations. We had an annualised 15 per cent return since inception but part of that is that we have had enormous fair weather behind us," he says.
"Our biggest challenge is to understand that that type of performance is exceptional, not the rule. We will have some positive times but we will be taking it on the other side."
Orr, who was chief economist with Westpac before joining the Reserve Bank, won't comment on the state of the New Zealand or world economy, except to say he is relieved he has not been too close to the business cycle of late.
He says the fund's real strength is its liquidity and 30-year investment horizon. This allows it to make bold, high-return investments without putting the fund at risk. "We don't need to cash up anytime soon. We are not liquidity constrained, which allows us to take on risk."
North America is the fund's biggest market, accounting for more than 40 per cent of its investments in dollar terms, followed a long way behind by New Zealand, Europe and then Japan, Asia and Australia. South America, Africa and the Middle East hardly get a look in.
The fund's greatest exposure (now about 42.5 per cent) is to large, listed mainly US shares and, over the next three to five years, it will reduce that to 34.5 per cent, with the difference going into property and private markets.
It reached this decision in a review of its strategic asset allocation plan in late 2004. But finding the right sort of investments, especially in private markets where there is competing interest from private equity funds, can be a challenge.
Key sectors in private markets that the fund has its eye on are commodities, infrastructure and forestry - investments that fit comfortably into the fund's 30-year horizon. But the fund won't invest, or divest, for the sake of a plan. It is a long-term guide, not a manacle.
Orr says the guardians are committed to "responsible investment", evidenced by the fund's signature on the UN's Principles for Responsible Investment, a policy framework that allows the fund to join other funds and companies to encourage improvements in social, environmental and governance practices.
Orr doesn't say it but the "responsible investment" strategy falls short of "ethical investment" demanded by some campaigners - an approach that often demands that funds divest holdings in companies, whatever the cost, or exclude them from their investment mandates altogether.
"We have come off whaling and landmines and we are looking into nuclear weapons manufacturing and cigarettes," Orr says. "We want it to be seen that responsible investment is a core way of working."
This is a sensitive issue for a Crown entity but Orr's approach is quite clear - "engagement" is preferable to divestment or exclusion, a process that is just starting in international markets, he says. And the fund is not afraid to engage across the board to protect its investments.
He takes a favourable view of the New Zealand market, not least because it fits comfortably with the fund's investment portfolio and returns tax to the shareholder, the New Zealand Government.
