KEY POINTS:
The local investment industry stands to benefit massively from National's plan to direct a large portion of the "Cullen" fund into local assets but is far from unanimous in backing the plan.
National leader John Key this week said if his party formed the next government it would direct the New Zealand Superannuation Fund to invest at least 40 per cent of its assets into a range of New Zealand investments including bonds to fund large infrastructure projects.
The fund, which now stands at $14.5 billion, was set up by Labour five years ago to put money aside to help meet the cost of future superannuation payments.
It currently has 23 per cent of its portfolio based in New Zealand with 6.8 per cent in shares and the rest across cash, property, forests and other assets.
"National believes that a greater proportion of this increasing pool of capital, which belongs to all New Zealanders, should be invested in New Zealand to grow our economy," Key said.
Arthur Lim, of investment banking firm Giffney and Jones, and Rickey Ward, of Tyndall Investments, welcomed the prospect of a greater local allocation.
"It's not as if New Zealand doesn't have very good industries that could do with more support from a capital point of view," said Lim.
"Any day of the week I come across what I think are absolutely fantastic businesses and they are starved of capital. We find over the years, these businesses migrate overseas in search of capital. It's such a tragedy for the country."
"I do think there is a case for saying, if New Zealand industries are competitive and they can foot it locally or in the international arena, what's wrong with using the stock exchange to become overweight in them? In the process you bring their valuation closer to what they are really worth, rather than what we've seen over the years - New Zealand companies being sold cheap."
Ward said the fund was set up for the benefit of New Zealanders, "So why not invest in New Zealand assets to help benefit them in the first place?
"It's really hard to encourage foreign capital to invest here if you don't invest here yourself.
"It's a good move, it clearly should help the NZX and capital markets although it's not going to go all into there."
"It would obviously have a very positive impact on the financial industry in New Zealand but we'd have to be careful about creating a bubble in the process."
In fact, the danger of having such a great weight of cash - the fund is projected to grow to well over $100 billion by 2025 - inflating the value of assets in a small market like New Zealand is one of the main reasons cited for its limited local allocation.
Fund managers spoken to by the Business Herald said that with a target such as 40 per cent set in stone, there was a clear danger that money would end up invested in assets that would not produce the required level of return.
"That target could only be achieved gradually as suitably high quality assets became available," said one who went on to question whether it was optimal for the eventual beneficiaries of the scheme to have so much of the fund "focused on one narrow economy".
The fund was designed to operate on investment industry best practice, at arm's length from the Government to ensure its returns were not compromised by the temptation to use it to fund other projects.
Since its inception it has fended off calls for a greater level of domestic investment, particularly in local infrastructure.
Former chief executive Paul Costello told the Business Herald three years ago the fund's independence "avoids the confusion that can arise in trying to balance the expectation of high investment returns with the expectation that the fund's assets will be used for meeting other strategic objectives.
Where these two objectives are blurred, the usual result is that neither is satisfactorily met."
Michael Littlewood, co-director of the retirement policy and research centre at Auckland University, isn't convinced there is a fundamental need for the fund at all.
"Whether or not our superannuation scheme is secure or not depends entirely on the state of the New Zealand economy," he argues.
But in that sense he sees some value in the fund as a form of insurance.
Should the New Zealand economy perform poorly between now and when our demographic profile requires big funding for superannuation, a hefty chunk of savings in overseas markets - which will hopefully have performed better - will come in very handy.
Accepting that the fund will invest at least partly in New Zealand, Littlewood believes it should limit its exposure to businesses that are genuine new investments, creating genuine new jobs and genuine new growth.
"Those will grow the economy and it is only the strength of the economy that matters. Those businesses will also almost certainly not be listed companies. We're talking about private equity."
If the fund stuck to this type of "genuine new growth investments then it wouldn't really matter what proportion those represented of the fund as a whole".
"If we were rooting for New Zealand we would say the more of those the better because that indicates there's something good going on within the economy.
"If there are none then we should be worried about that but for other reasons."
NZX chief executive Mark Weldon, whose company also stands to benefit substantially, welcomed National's policy as a "bold" one that "aligns strongly" with the recent paper he co-authored with the New Zealand Institute's David Skilling.
Dismayed by what they saw as the lack of serious policy response to the looming economic crisis from major party politicians, Weldon and Skilling advocated a series of measures including a revised approach to the management of Government investment vehicles including the Super Fund as well as the ACC and EQC.
Yesterday Weldon took a few shots at the "portfolio theory" employed by conventional conservative fund managers.
Those managers, said Weldon, would all tell you US investor Warren Buffett is a madman, "He makes very lumpy bets, doesn't diversify and invests where he thinks he has an advantage, an edge if you like".
Weldon believes the New Zealand Super Fund, with its long-term investment horizon and local knowledge, would have a huge "edge" in the local market and should move to exploit it.
He envisioned the fund being the first port of call for New Zealand corporates, other businesses and infrastructure projects seeking funding.
"There's no intention the Super Fund would go soft on New Zealand corporates here but I think there are advantages and opportunities to monetise the unique and intangible attributes that this specific fund has."
That said, Weldon did not believe finance ministers of either stripe should be the ones to try to wield this "edge".
"I don't think there's anything like that in the National proposal."
While there was "no question the fund was doing a good job", its reliance on industry standard portfolio theory reflected "a fundamental lack of confidence in the New Zealand economy to deliver returns".
