Returns sole purpose of NZ nest egg

By ELLEN READ

The New Zealand Superannuation Fund (NZSF) is going to be the country's biggest investment.

Already worth $2.4 billion, it will build to $100 billion in 20 years.

That is slightly less than New Zealand's Gross Domestic Product and nearly three times the sharemarket's present market capitalisation.

The purpose of the fund is to partially pre-fund the pension payments required when the population bulge from the baby boom generation peaks in about 20 years.

Because of this, the fund's success, or otherwise, has huge implications not only for those who will draw pensions but also for future taxpayers.

The sheer size of the fund means that its investment plan has been eagerly awaited by financial markets. It was issued last week.

Seventy-eight per cent of the money will be invested overseas.

Of the total fund, 59.5 per cent goes to global shares, 10 per cent to global fixed interest and 8.5 per cent to global growth assets.

New Zealand shares get 7.5 per cent of the total fund, local fixed interest gets 10 per cent and local growth assets the remaining 4.5 per cent.

The guardians explained that the underlying rationale was to spread investments to maximise long-term returns without undue risk.

But the release of their proposals has prompted vigorous debate in several key areas.

1) Should more money be put into local shares?

The biggest talking point is the small allocation made to New Zealand equities. At only 7.5 per cent of the fund, it is half what most local superannuation funds invest in local shares and four times lower than the maximum the stock exchange said it could handle.

In dollar terms, the 7.5 per cent means about $140 million invested each year up to a total $7.6 billion in 20 years' time.

Most New Zealand pension funds invest about 15 per cent of assets in local shares.

The NZSF defends its lower allocation on the grounds that it is a much larger fund, so although it is investing a lower proportion, it will quickly become the largest New Zealand investor in the stock market.

In 10 years the fund will have allocated $2.9 billion in New Zealand shares, and in 20 years this will grow to $7.6 billion.

The Listed Companies Association is unhappy about the 7.5 per cent, saying they have been shortchanged by a short-sighted policy.

"New Zealand companies seeking substantial funds by way of debt or equity almost inevitably resort to overseas markets simply because of the lack of capacity here," chairman John Blair said.

"The NZSF has just missed one of the best opportunities New Zealand capital markets have had for many years."

Although he and the Stock Exchange would like a larger portion, others think 7.5 per cent is already too much.

Jason Wong, strategist at First New Zealand Capital, says NZSF is correct to limit local investment.

"I think most fund managers would agree that if they [NZSF] owned much more than that, then eventually they would have to cut the rating because simply the fund size would be too large relative to the size of the New Zealand equity market."

2) Is it prudent to put 68 per cent of the funds assets into shares? What if global markets collapse?

The fund's ambitious target of a 9.7 per cent annual return means it is definitely growth oriented and therefore must invest heavily in shares.

The fund's stance is that although there are periods when shares perform below other asset classes - the past few years for example - over longer terms shares have always rewarded investors with better returns.

This is certainly the case at the moment. The local sharemarket up around 9 per cent this year, and 10- year bonds for example are yielding just over 6 per cent.

Greens co-leader Rod Donald is unconvinced, saying the guardians are crazy to risk more than half the fund on foreign stockmarkets.

"Overseas sharemarkets have proved a graveyard for New Zealand investments."

Donald said placing large amounts of money in overseas equities helped turn a forecast profit of $232.8 million into a $47.7 million loss for the Government Superannuation Fund (GSF).

"The Government admits that profit is its only consideration.

"That means our money will end up bankrolling the Lockheed-Martins, Monsantos, McDonald's and Sky Cities of this world, regardless of the misery they might inflict on people and the environment."

Donald would prefer to see the fund's money invested in New Zealand to build a sustainable economy.

3) Politics aside, what are the practical effects of placing so much money overseas?

Initially, the fund will hedge 60 per cent of its overseas shares and all of its overseas fixed interest back into New Zealand dollars. Such insurance will protect against currency fluctuations but add 0.2 per cent to costs and make it more difficult to achieve the 9 per cent-plus projected returns.

Investing more domestically would give more weight to the advantage of local knowledge and avoid hedging risks and costs. The flip side is that the fund would then be less widespread from a risk point of view and its investments less diverse.

The markets were not disturbed by news of the high overseas allocation and accompanying hedging policy. Westpac currency strategist Johnathan Bayley said it brought little reaction in the currency, as the flows generated would be easily absorbed in normal market activity.

4) Should the fund make direct investments in New Zealand companies or infrastructure?

In 20 years, the fund will have almost $22 billion of investments in NZ in listed companies, fixed-interest securities and other areas such as private equity, property, infrastructure and commodities (for example, forestry).

NZ First leader Winston Peters wants some of that money invested in the failing infrastructure.

"While ratepayers in Auckland and elsewhere are facing huge hikes in their local taxes to help restore the country's infrastructure," he said, "the superannuation fund is largely going offshore."

The fund is not allowed to take a controlling stake in any asset, and chairman David May said any investments in private equity or venture capital would be made via funds and not directly.

That rules out some form of economic development role, so do not expect the fund to buy the National Bank or develop a Think Big 2.

The guardians' sole responsibility is to get the maximum return without damaging New Zealand's reputation.

They can reasonably point out to critics that if there are wider ethical, economic or political questions, these should have been addressed when the fund was set up.

The guardians may be copping the flak, but they are just doing what is required of them under the rules laid down by the Government.

- additional material: NZPA