Guardians wary of distorting market

The NZX-50's market capitalisation has decreased since the Super Fund started investing in October 2003. Photo / Richard Robinson

The Guardians of the Superannuation Fund fear it will have a major impact on the New Zealand sharemarket unless the market continues to grow in line with the fund.

Details of a December briefing to Finance Minister Bill English were revealed yesterday by current affairs website Pundit.co.nz after the website complained to the Ombudsman about the fund's censoring of the briefing.

The briefing responded to Government plans to direct the fund to allocate 40 per cent of its money to domestic investments.

Initial details released after an Official Information Act request in April found the guardians opposed the proposal strongly and believed there would be significant challenges in finding enough suitable investments to meet the target.

Since then the Government has suspended contributions to the Super Fund for up to 11 years and dropped plans to force the fund to increase its NZ investments.

But the new details reveal the depth of the guardians' concerns about the local market. The guardians said the fund already had to adjust the way it deployed cash to the New Zealand equity market to reduce the extent in which it would push up prices when buying. "Unless this market grows substantially, it will become increasingly difficult to maintain our current percentage exposure without impacting market liquidity and price."

Even to maintain the fund's current exposure, the guardians said, the market must grow at the same rate as the fund.

But rather than growing, the NZX-50's market capitalisation had shrunk since the fund started investing in October 2003.

The guardians said allocating significant capital to the New Zealand private-equity market would be even more problematic.

The fund had allocated money to two private-equity funds but the guardians said institutional quality offerings were few and far between.

The problems were the same for the property and private market assets and the guardians warned the fund could be forced to become a "price taker" if it had to increase investment in property.

They were also highly critical of the local bond market, noting that it is relatively small, illiquid, undiversified and poorly priced compared with comparable credit opportunities globally.

The only area the guardians were really interested in was increasing investment in infrastructure assets, but even then they warned future governments could face public resistance to the sale of local assets when it came to realising the investment.

The new details also reveal the guardians overstated the fund's exposure to the New Zealand market.

It had said it had 17.9 per cent invested domestically, not including its cash levels.

But a censored statement reads: "In the case of private equity, property and timber the exposures are likely to be overstated somewhat as they are based on most recent appraised values, which do not reflect the recent falls in global asset prices."

As of the end of May the fund's assets were worth $13.1 billion.