Inside Money: Most likely not appropriate - NZ Super's bungled loan

Adrian Orr, Chief Executive of the New Zealand Superannuation Fund. Photo / Steven McNicholl

Most likely not appropriate: representative for financial aspects and finance verdict on NZ Super bungled loan deal

News List Online makes about as much sense as anyone out of the New Zealand Superannuation Fund (NZS) Portuguese inquisition.

"Russel Norman, a brand new Zealand Eco-friendly Party Mega pixel and representative for financial aspects and finance, told the newspaper that "taking extremely high risk opportunities is most likely not appropriate," News List Online reports in a wonderfully bungled auto-translation.

The Mega pixel has a point. In retrospect, NZ Super's US$150 million foray into the European bank prop-upping business looks bad: it is bad.

(But there is some good news. Reuters reported in January a few Goldman Sachs bankers had their bonuses docked after the Banco Espírito Santo (BES) loan sunk into 'bad bank' territory.)

NZS, however, disputes the 'extremely high risk' label and, as usual, supplies a lot of information to explain.

"This investment is part of a broader active investment strategy to invest in a range of credit opportunities globally. This strategy has been in place for a number of years and has been successful over time and when considered as a whole," the NZS info pack says. "This particular investment opportunity was to purchase the bonds at a level where the Fund was getting a yield that that was higher than the cost of the credit protection insurance that it also bought."

NZS has also done well to pitch the episode as a lesson in diversification: the loan (which may be returned in full or part) represents only 0.7 per cent of a $27 billion portfolio, which has been designed to handle a loss or two.

Scaled down to a $100,000 portfolio, that's a loss of $700 - some people spend more than that on lotto each year.

But as a proportion of the NZS fixed income portfolio (which is 11 per cent of the total fund, according to the NZS January performance report), the BES loan looks like a much bigger bet. By that measure, the BES loan represents 6.6 per cent of NZS' fixed income portfolio, which may be a more appropriate way to quantify the risk.

NZ Super is no doubt reviewing processes and risk assumptions.

And, optimistically, at least some of the BES loan may eventually return home.

News List Online puts it best: "NZ Super has wiped off an investment like a precaution."