New Zealand Superannuation Fund's investment team is working to bring as much science as possible to the art of profiting when capital markets deviate from fair value.
One hint that the Auckland-based fund's approach to dynamic asset allocation might differ from that of other big asset owners: the precise 690-basis-point maximum risk limit the NZ$25.5 billion (US$21.6 billion) sovereign wealth fund's board currently imposes on its 5-year-old “strategic tilting” program, as a tracking error from the fund's passive reference portfolio.
That figure is calculated from the combined risk exposure limits the fund sets for the liquid asset classes covered by strategic tilting: equities, bonds, credit and currencies. The fund doesn't disclose its risk limits for specific asset classes.
As of April 30, the fund had 62% in global equities, 11% in fixed income, 6% in property, 5% in timber, 5% in domestic equities, 4% in infrastructure, 3% in private equity, 3% in “other private markets” and 1% in rural farmland. But after tilting, the posted numbers could diverge sharply from the actual allocation, which isn't released because of concerns about front-running.
In recent interviews, senior fund executives said they believe New Zealand Superannuation's approach — which they variously described as “hyperactive rebalancing” or “rebalancing on steroids” — is more model-driven and less dependent on discretion and qualitative judgments than many other big asset owners' dynamic asset allocation programs.
New Zealand's strategic tilting program — launched just as global stock markets started to rally from the ravages of the global financial crisis — is a “classic, (mean reversion based) long-term investment strategy,” with New Zealand's team incrementally adding or reducing exposure to liquid asset classes as and when their prices diverge from fair value, said Adrian Orr, the fund's CEO.
In New Zealand Superannuation's annual report for the year ended June 30, 2013, Mr. Orr pointed to strategic tilting as “an area in which we aspire to be a global leader.”