Cullen fund treads softly

Strong performances by local and overseas sharemarkets have delivered returns well above target for the Cullen fund's first 16 months.

"But we are not crowing about it," said David May, chairman of the Guardians of the New Zealand Superannuation Fund, appearing before Parliament's commerce select committee yesterday.

He said the fund invested for the long-term and would not want to be judged by short-term performance.

In the 16 months to the end of January, the fund's annualised return was 11.9 per cent.

The Guardians' target is to exceed the return from the risk-free option of Government bonds by 2.5 per cent. At current bond yields that target rate would be about 8.3 per cent.

The fund has $5.4 billion entrusted to it and another $80 million pours in every fortnight.

It is intended to ease the burden on taxpayers by partly meeting the cost of future New Zealand superannuation payments. The Guardians' role is to set an asset allocation strategy, appoint fund managers in the chosen markets to invest the funds and monitor their performance.

At the moment, the fund has no money invested in property or "alternative" assets such as private equity, infrastructure, commodities, forestry and hedge funds.

Eventually, it is intended that 6 per cent will be in property and 7 per cent in alternative assets.

In the meantime, the fund is overweight in equity and fixed interest securities. Happily, sharemarkets have been doing well.

At December 31, the fund had $528 million in New Zealand shares. The return (for 15 months, annualised) was 30.7 per cent, which beat the benchmark return of 27.7 per cent.

The long-term asset allocation for New Zealand equities is 7.5 per cent of the fund.

"We have no reason to believe that in the long-term New Zealand will perform any differently than world [equity] markets," May said.

"But New Zealand is a small market and you don't have to get very big before you start driving up prices when you are buying and driving them down when you are selling.

"We think 7.5 per cent is about right. If the market grows substantially we might look at it again."

The fund is expected to exceed $100 billion in 20 years.

At the end of last year, 63 per cent of the fund, or $3.36 billion, was invested in international equities through 11 fund managers. The return was 17.7 per cent, beating the market by 3 percentage points.

Asked why the services of so many fund managers were needed, Guardians chief executive Paul Costello said: "A fund this size would not normally have so many, but we are building a structure to endure for many years.

"Having a spread of managers reduces the risk of underperformance and the modest extra cost is outweighed by the probability of excess returns."

The Guardians are building up their capacity to appraise opportunities to invest in alternative assets such as infrastructure.

Costello said the criteria would be global - potential New Zealand investments would be appraised on the same basis as international ones.

"We intend to be well-placed to assess any opportunity to invest in local infrastructure. The quality of opportunities remains to be seen."

As investments in infrastructure projects were likely to be long-term and illiquid, they needed to be thoroughly evaluated before funds were committed.