Tēnā koe i runga i ngā āhuatanga o te wā,
The NZ Super Fund has staged a strong recovery after seeing off the immediate shock of the COVID-19 crisis last year that saw its value drop by $13.4 billion in a matter of weeks. From that low point, the Fund is now up 60.2% – its fastest ever period of growth and reflective of an extraordinary turnaround in global capital markets.
The COVID-19 crisis has highlighted some important points about the NZ Super Fund
The Fund is heavily weighted to growth assets such as shares – this is appropriate and normal practice for long-term investors.
The Fund is therefore highly sensitive to market movements which can have a significant, sometimes dramatic, impact on the Fund’s value.
With no substantial withdrawals from the Fund scheduled until the 2050s, we are able to remain focused on implementing our long-term investment strategies, while managing Fund liquidity (our ability to meet short-term funding requirements) appropriately.
Our experience shows the benefits of remaining invested in the share market and capturing returns as prices recover over time. In times of market stress we can take advantage of opportunities to buy at an attractive price.
Taking a short-term view of performance returns can be deceptive. A lot depends on your starting point – especially if it’s a low point. Longer time periods, such as the performance of the Fund over the eighteen years since investing began, are a more appropriate lens.
Staying the Course
We maintained our long-term risk profile throughout the market volatility, as well as adding to our equity and credit market exposures as markets fell. Our robust liquidity framework allowed us to maintain our portfolio currency hedging, which has been very valuable as the New Zealand dollar has rallied significantly from its lows last year.
Provisionally, at the end of May 2021 the Fund was worth $58 billion, off the back of net Government contributions since inception (after deducting the tax paid back to Government by the Fund) of $12 billion. The Fund has returned 10.5% p.a. since inception, beating its passive Reference Portfolio benchmark by 1.2% p.a. or $9.9 billion.
In the eighteen years that the Fund has been investing, we have generated over $37 billion more than the government would have saved by repaying debt, demonstrating our significant and ongoing contribution to New Zealand’s national wealth. Figures are unaudited and after costs, before New Zealand tax.
The Factors driving Fund performance
The turnaround in global equity markets that has driven Fund performance over the past year was underpinned by significant fiscal and monetary stimulus – government spending to support and promote economic growth through and after the COVID lockdowns, and very low interest rates. While the near-term outlook remains positive, a combination of strong demand and impaired global supply chains has already seen acute inflation pressures in some markets and projections are for inflation to increase to levels not seen for many years.
Markets are watching policy makers closely as their responses to higher inflation will shape the direction of interest rates, asset returns, and market volatility over the next few years. Beyond that, we believe the persistence of the current environment of low interest rates and high asset prices will deliver lower Fund returns than what we expect them to be over the long-term.
In March this year we said goodbye to our Chair Catherine Savage after eleven and a half years’ service on the Board, including more than five years as Chair. Her contribution has been immense and she will be missed.
Catherine Drayton took over as Chair in April. She has been on the Board since 2018 and previously chaired the Audit Committee. Catherine holds several other governance roles including chair of Christchurch International Airport and director of Genesis Energy.
We also welcomed global capital markets professional Kirsty Mactaggart to the Board in April for a five year term.
Our General Manager of Finance and Risk Stewart Brooks announced his intention to retire later this year. Stewart has been with the Guardians since 2003, making him our longest serving employee. He has made a huge impact on the Fund and will also be missed. Following this announcement, we have made a number of new appointments to the Leadership Team:
General Manager, Finance and Investment Operations – Paula Steed
General Manager, Risk – Mark Fennell
General Manager, Technology – David Sara
General Manager, Portfolio Completion – George Crosby
Other changes include:
Dr Charles Hyde has been appointed Head of Asset Allocation.
Alice Mew (Direct Investments Senior Investment Strategist) has been appointed to Chair the Investment Committee for a two-year period.
Joe Halapua has been appointed to lead the Guardians’ New Zealand Equities team.
Portfolio Activity Update
Tactical Credit Opportunity Mandate (TCO) We have implemented a new internally managed credit mandate. The TCO mandate replaces an internally managed mandate that had been in operation for over ten years, earning a return of around $1 billion over that time. The new mandate rests on the same investment drivers and has been expanded to be more scalable given the expected growth in the Fund over time.
Rural Land Strategy Review We have completed an internal review of our Rural Land Strategy. Our $600 million Rural Land portfolio includes 32,200 hectares of land in New Zealand and Australia. We are looking to increase our rural land holdings, with a focus on owning land with natural capital potential that we can actively support through sustainable farming practices. We will continue to diversify our rural land holdings into international horticulture investments.
Real Estate Strategy Review Following the arrival of Toby Selmanas the Real Estate Senior Adviser, we have reviewed our approach to real estate and established a global strategy for this asset class. This is broadly centred around living, logistics and technology-orientated real estate in sustainable cities with attractive market fundamentals. The investment team has started to execute on this strategy.
Pioneer IV We committed $100 million to a new investment fund managed by Auckland-based Pioneer Capital. The fund, Pioneer’s fourth, will invest in New Zealand companies that are seeking international growth in high margin sectors. We will be a cornerstone investor in the $300 million Pioneer Capital Partners IV, which is expected to be invested across six to eight individual companies.
Governance Documents Published
Our commitment to the Fund’s long-term investment strategy amid the uncertain global economic environment is underlined in our Statement of Intent 2021 – 26 (SOI) and Statement of Performance Expectations 2021 – 22 (SPE), published this week. Both documents set out our short-medium strategic undertakings with respect to both the NZ Super Fund and the Elevate NZ Venture Fund.
The SOI sets out the key elements of our strategic plan and provides a detailed explanation of the measures we use to assess our performance in the areas of investment, cost control, risk management, governance and organisational capability. The SPE sets out our high priority activities and forecast financial statements for the next financial year.
As a member of HRH The Princes of Wales' Sustainable Markets Initiative,we have been involved in the task forces made up of the 'coalition of the willing' to drive action on accelerating, at a global scale, sustainable industry transition and rapid decarbonisation ahead of 2050.
We are also participating in a collective investor engagement on facial recognition, along with more than fifty other investors representing over US$4.5 trillion. This two-year collaborative engagement programme aims to prioritise human rights in relation to use of facial recognition technology and seeks constructive dialogue with global companies developing or using the technology. The initiative, which has been welcomed by the United Nations-supported Principles for Responsible Investment (PRI), advocates for adequate risk management and improved corporate disclosure.
Treasury Working Paper Published on the NZ Super Fund
The New Zealand Treasury has today published a Working Paper, Golden Years – Understanding the New Zealand Superannuation Fund. The paper provides a comprehensive analysis of the Fund’s role in New Zealand’s public finances, including explanations of the mathematical relationships behind the Fund’s legislated contribution rate formula, future outcomes for the Fund’s size and role in helping to fund New Zealand Superannuation, and why projections related to the Fund have changed over time.
Reviewing our Responsible Investment Strategy
One of our key focus areas this year is a review and reset of our Responsible Investment Strategy. While we are proud of our strategy, and note it has been recognised internationally and by the High Court of New Zealand as in line with best practice, we want to ensure it is fit for the challenges of the next ten years and beyond. The review has three workstreams:
Emerging trends and stakeholder expectations,
Ways to improve Environmental, Social and Governance (ESG) performance in global listed equity portfolios, and
How to increase the number and scale of positive investments (investments which provide social and environmental benefits in addition to the required financial return).
We look forward to updating you on progress on this work later in the year.
Hei konā mai,
Chief Executive Officer
Guardians of New Zealand Superannuation
[AUCKLAND, NEW ZEALAND, 23 June 2021] Three months on from the Government’s housing policy announcement on March 23, new analysis by CoreLogic has revealed the changes are yet to have much discernible impact on the market.
CoreLogic’s Head of Research Nick Goodall says “It’s still early days and hard to disentangle the Government’s Brightline extension and tapered removal of interest deductibility from other measures, such as higher deposit requirements. However, as more time passes, the tax changes in particular should more clearly curtail purchases of existing properties by mortgaged investors. This could be heightened by the incentive for investors to look at new-builds if the Government allows interest deductibility on these properties for an extended period.
“First home buyers (FHBs) have been keen to buy new properties of late, so this diversion of investors’ focus from existing property to new-builds could have an unintended negative consequence on FHBs, who have already been struggling under the weight of rapidly rising home values and growing affordability constraints.”
When conducting the analysis, CoreLogic drew on four primary market indicators:
Weekly flow of new listings
CoreLogic Chief Property Economist Kelvin Davidson says “Our listings data shows that new listings certainly haven’t spiked since the announcement, so there doesn’t seem to have been a rush to exit the market by existing landlords. Instead, they are taking their time and assessing their options. To us, the large Brightline tax bill that would await some landlords if they sold straightaway and also the lack of ‘trusted’ alternative investment options are key factors here.”
Annual % change in rents
“Although it’s inevitable that some landlords will have raised rent off the back of the changes, it’s not really showing through in aggregate. The stock measure is still just ticking along at normal rates, and although the flow measure has accelerated, it’s hard to extricate how much of that might be due to landlords wanting to recoup costs versus genuine supply/demand pressures versus perhaps, even some kind of ‘catch up’ after last year’s COVID-related rent freeze,” says Mr Davidson.
Source: Stats NZ
While there are signs that sales volumes have eased, Mr Goodall says it’s not obvious that this is really due to markedly softer demand.
“Our data on the trend for volume of valuations ordered by banks indicates that borrower/valuations activity, which is an early indicator of demand, is still pretty solid. At the same time, it’s the shortage of listings/choice that’s probably playing a role in limiting agreed sales, too.
“In terms of prices, there is some evidence of a slowdown, but not much. Using data from our very latest unconfirmed sales records, the premiums buyers are paying over and above CVs have eased back in the past month or two, but not dramatically so.”
Mortgaged investors’ share of purchases
CoreLogic’s analysis reveals the only key indicator that has shown obvious signs of change in recent months is the buyer mix.
Mr Davidson says “On our Buyer Classification series, mortgaged investors’ market share has dropped from 29% across January to March as a whole, to just 25% in May. But even then, it’s more likely that this is actually due to measures other than the March tax changes, such as the fact that investors have been required by lenders to stump up a 40% deposit for the past five to six months now.
“Compared to the last time investors were required to have 40% deposits (from October 2016 to January 2018), the evolution of mortgaged investors’ market share has so far been similar in both cycles, but with the extra attention investors are getting this time around, there surely has to be a chance that their share will ultimately fall below the previous trough.”
Mr Goodall adds “Overall, our data and analysis shows the tax changes on their own haven’t had any real impact so far. But it’s really important to reiterate that it’s hard to isolate the effects of one rule from another. It’s also early days, and we think the tax changes will in fact bite harder as time goes by.”
For more housing market insights from CoreLogic New Zealand, visit www.corelogic.co.nz/news.