Super Fund seeks NZ investments with 'hometown advantages'

The super fund is considering more investing around thematics such as ageing populations, climate change, and rapid urbanisation. Photo / iStock

The New Zealand Superannuation Fund is actively seeking new domestic investment opportunities where it believes it has "hometown advantages" but chief executive Adrian Orr said they're difficult to find at the scale it needs.

The NZ Super Fund's 2014/2015 report released today shows it had $4.4 billion of its $29.54 billion portfolio invested in New Zealand compared to $3.7 billion a year earlier. Domestically it made one major purchase in the past year - an additional 3.2 percent stake in Kaingaroa Timberlands, bringing its total investment in the North Island forestry business to 42 percent.

The fund first invested in Kaingaroa, its largest investment with an estimated value of $1.4 billion, in 2006. Orr said Kaingaroa is also one of its top-performing assets.

"It has been a fantastic investment for us, as have Datacom and Scales," he said. "We are continually seeking and being very proactive in New Zealand for good investment opportunities but any investment still has to stack up with global opportunities."

The fund's hometown advantages include being one of a few vendors able to write a large-sized cheque within the timeframes required by some vendors, not requiring Overseas Investment Office approval that offshore investors are subject to, and being local and Crown-owned means it can add value to the investee company's brand, it said.

The top-performing investment globally has been the fund's 50:50 deal in Z Energy which cost $209.8 million, has already returned $784.6 million. Its remaining 10 percent stake is valued at $246 million. "We were able to add value and list it so we had the hatch, match, and practical despatch," Orr said.

The fund is prepared to be patient for the right opportunities in New Zealand, he said, including any big scale infrastructure development and public-private partnerships.

It's reasonably difficult to find businesses with an enterprise value of $400-to-$500 million as not a lot of those pop up on the market and they have to represent good value rather than just being an asset for sale.

"We have to have partners as we can't be the controlling shareholder," Orr said. "It's reasonably difficult to find businesses with an enterprise value of $400-to-$500 million as not a lot of those pop up on the market and they have to represent good value rather than just being an asset for sale. People get those two things confused."

The fund returned 14.6 percent after costs and before tax this year, beating its passive Reference Portfolio benchmark by 4.45 percent and marking its third-strongest value-add performance in 12 years.

Set up to help pay for baby-boomers' pension payments, the fund is not expected to peak in size until the 2080s and the government isn't expected to start using the money until around 2031. The government halted contributions to the fund in 2009 and has said it won't resume them until core Crown net debt is 20 percent of GPD which is likely to be in 2020/21.

Since inception the fund has returned 10.11 percent per annum, generating $13 billion in investment returns over the Treasury Bill return, a measure of the cost to the Government in contributing to the fund instead of paying down debt. It has also exceeded its passive Reference Portfolio benchmark by an estimated $4 billion to date.

Gavin Walker, chairman of Guardians of NZ Superannuation which operates the fund, said while the latest strong annual performance is pleasing, people shouldn't get too caught up in the highs and lows of annual or even medium-term return rates. He reiterated a warning that stakeholders should expected future fund returns to be lower.

We don't want to be caught with stranded assets such as fossil fuels which may become economically unviable and we want to have an edge on new sustainable energy by working with a number of different folk.

Adrian Orr

Tilting, an investment strategy implemented by the Guardian's in-house team, was the main contributor to the fund's out-performance of global markets during this past year and since inception.

Orr said since the June balance date, the first quarter of the 2015/2016 financial year has been rough with a lot of volatility in global equities markets but that works in favour of its contrarian investing strategy.

"The most fantastic opportunities for us came during the GFC. Did it feel like fun at the time? No, it was really, really, hard and we didn't have any examples to show people what we were talking about because it was brand new."

He said the outlook for the next two to three years was a low yield environment but because the fund was not driven to meet any annual liabilities, there were some good buying opportunities to be had, particularly in Europe.

The super fund is considering more investing around thematics such as ageing populations, climate change, and rapid urbanisation and is already executing a strategy to diversify the portfolio into alternative and non-conventional energy alongside its traditional energy investments.

Its investments in Ogin, Bloom Energy, LanzaTech, and View Inc provide access to alternative energy and it has also committed US$350 million to invest via a United States-based collaborative platform targeting clean energy investments over the next five years.

"We don't want to be caught with stranded assets such as fossil fuels which may become economically unviable and we want to have an edge on new sustainable energy by working with a number of different folk," Orr said.