Coronavirus could challenge NZ Super investment assumptions

New Zealand Super's governance structure enables the fund to take the long view in responding to the coronavirus sell-off, but the unusual nature of the crisis will force its investment team to review their market assumptions along the way.

NZ Super has about 35 years before it begins contributing to government retirement outlays, which gives the Auckland-based sovereign wealth fund the luxury of "a very long time horizon," said Stephen Gilmore, chief investment officer. That, in turn, allows the fund to maintain an 80% target allocation to growth assets — predominantly publicly listed equities, he said.

NZ Super's board and investment team recognize that its high-octane strategy — with a combined 71% of its portfolio parked in listed equities as of the June 30 close of its latest fiscal year — leaves the fund exposed to "negative shocks," said Mr. Gilmore, who took on the fund's CIO role in February 2019.

And indeed, even with global equity markets in recent weeks recovering much of the ground they lost in their 30% plunge between Feb. 23 and March 23, the up-to-the-minute tally of NZ Super's portfolio value on the fund's website stood at NZ$40.4 billion ($24.1 billion) on April 23, down 13% from the end of January.

At moments like these, strong governance practices — focused on communicating with stakeholders ranging from the fund's board to the broader public — let the organization maintain an "in it for the long-term" approach, Mr. Gilmore said.

That doesn't mean the investment team is just sitting back and waiting for markets to recover.

"When markets are falling, we're going to lean into that," Mr. Gilmore said, pointing to New Zealand Super's strategic tilting program — which uses futures and derivatives to add to or cut exposure to markets deviating from the investment team's estimates of fair value — as its primary tool for taking advantage of market dislocations.

With a framework and parameters in place, and governance structures built up over the decade-long life of the program, strategic tilting "allows us to act fairly quickly" — buying markets "as they appear to become cheaper, and buying more as they become even cheaper," he said.

While the process is to a certain degree automatic — a help in uncertain environments where it's hard to make subjective decisions — it's not entirely so, said Mr. Gilmore, adding "there's a lot of human oversight."

The program added 17 basis points of investment gains for New Zealand Super's portfolio for the fiscal year through June 30, 122 basis points the previous year and 227 basis points the year before that.

More asset owners in Australasia have launched similar tilting programs in recent years. HESTA, the A$50 billion Melbourne-based super fund became the latest industry heavyweight to do so, announcing April 14 it had appointed Luke Galloway as its first general manager for strategic tilting.

Mr. Gilmore said having strong governance arrangements in place could prove the biggest challenge for super funds adding strategic tilting programs now, since such programs can detract from returns if already-undervalued markets become even cheaper before rebounding. The stronger the governance arrangements, the more risk a strategic tilting program can take on, he said. He declined to say what risk limits New Zealand Super places on its program.

Even so, decisions on which equity market, bond market or currency market New Zealand Super's tilting program should overweight or underweight are ultimately driven by investment team assumptions about markets and economic policy — assumptions that could be challenged by the current crisis.

In an event like this, with markets and economic policy alike moving at breakneck speed, "you have to ask, 'is it different this time?'" Mr. Gilmore said.

"There are a lot of moving parts and it's too early to conclude what this all means," he said. But along the way New Zealand Super's investment team members will need to ask themselves "how confident are we that our assumptions are still holding."

While short- and medium-term assumptions are more relevant for New Zealand Super's tilting program, at this point it is difficult to rule out the potential for longer-term implications from the crisis as well, Mr. Gilmore said.

For example, as governments around the world take on more debt now, will that make it difficult for central banks to allow rates to rise over the next two, three or four years? And if interest rates end up being much more controlled, do other economic variables become more volatile? With governments providing ever more support to corporations and individuals, do they become more invested in the outcomes? Mr. Gilmore asked.

So far, "policy actions did cause us to rethink our nearer term view on interest rates and that did lead to some small portfolio changes ... (but) it's probably too soon to draw definitive longer-term conclusions," he said in an email.