In the country’s biggest single investment mandate, State Street ended the financial year with almost $8 billion under management for the NZ Superannuation Fund (NZS).
The just-released NZS annual accounts show the State Street passive global equities mandate sat just $24 million shy of the $8 billion mark as at June 30, representing 20.3 per cent of the fund’s $39.4 billion under management at balance date.
Northern Trust and BlackRock managed about $7.9 billion and $7.2 billion, respectively, for NZS at June 30, albeit split among several mandates including a $770 million portfolio targeting ‘value’ and ‘low-volatility’ stocks in the case of the former.
The Connecticut-headquartered hedge fund firm, AQR Capital Management, also managed a combined value and low volatility factor portfolio for NZS of almost $920 million, the report shows. Since June 30 the now $40 billion plus fund had converted the factor-combo portfolios into separate mandates, Matt Whineray, NZS chief, said in September.
Whineray said NZS would likely allocate more of the global shares allocation – currently about 65 per cent of the portfolio – to factor tilts with a multi-factor manager tipped to be appointed soon. Given the large exposure to global equities, the NZS would fall by more than half (or a loss of $20.3 billion based on the year-end portfolio settings) if there were an exact repeat of the global financial crisis now, he says in the report.
Overall, NZS has outsourced close to $30 billion spread across 31 different managers and multiple asset classes. The remainder – about $10 billion – is managed in-house across a range of strategies including local equities (active and passive), cash, direct investment, emerging markets, life settlements, securities lending and volatility.
The number of external managers has dropped in recent years as the NZS adopted “a commitment to fewer, deeper relationships, with a goal to focus our efforts on managers with the greatest knowledge-sharing potential”, the annual report says.
“Over the past year, the Guardians refreshed its manager segmentation framework to focus more on breadth, capability and willingness,” the report says. “We are tracking research support, fireside chats and training and secondment opportunities to ensure managers meet our information-sharing expectations.”
During the 12 months to June 30 the NZS returned 12.43 per cent after costs but before tax, the report says, compared to the passive ‘reference portfolio’ return of 10.42 per cent.
However, over the same annual period NZS’ poorer cousin, the Government Superannuation Fund (GSF), underperformed its reference portfolio by 0.5 per cent. The $4.5 billion returned 10.5 per cent after costs compared to the benchmark portfolio’s 11 per cent, according to the GSF annual report (also published last week).
“For the first time in several years active management subtracted value,” the GSF report says. For the 10 years to June 30, the GSF beat the reference portfolio by 0.1 per cent.
The GSF, which is advised by Russell Investments, recently revamped its reference portfolio settings, lifting the international shares allocation at the expense of global fixed income while the remaining 10 per cent NZ shares target remains unchanged.
“From 1 July 2018 the allocation to global equities will be increased gradually over two years to 70% and the allocation to global bonds reduced to 20%,” the GSF report says.
“This represents a shift of more than $400 million and will increase the Fund’s expected return and risk…
“… The Board believes that although global equities are highly priced by historical standards at present, and more risky to that extent, global government bonds also offer historically low yields, in many cases negative in real terms. It considers, on balance, the reward for taking risk over the next decade has increased.”
During the 12 months to June 30, the GSF fired one of its 26 external international shares managers (Genesis Emerging Markets) while awarding a new global private equity mandate to the Stepstone Group.
GSF chair, Cecilia Tarrant, says in the report that the fund had also introduced a “long-short strategy with one of its existing global equities managers to capture an increased return from their skill at picking stocks”.
“Finally, the Fund has engaged an external manager to assist with implementing its dynamic asset allocation more efficiently,” Tarrant says.
The GSF helps plug the funding gap in the, now-closed, government employee defined benefit pension scheme, which housed some 52,577 members (including 7,743 still contributing) at balance date – about a 1,000 fewer than in 2017.
As at June 30 the government pension deficit stood at about $8.2 billion compared to $8.7 billion 12 months previously.