
The Accident Compensation Corporation (ACC) has hosed down investment performance expectations, projecting average yearly returns could fall 50 per cent below its almost 30-year record.
In its just-released annual report, the ACC says: “We expect future returns to average around half of what has been achieved historically (ie less than 5% per annum rather than the 10% historically achieved). This is because interest rates are now at low levels, and other investment assets such as equities are starting from high valuation levels.”
Similarly, the ACC fund now faces a higher probability of losing money over the short term despite only falling into negative territory once in its 29-year history.
“With lower expected investment returns from fixed-interest assets, there is now less of an income buffer to absorb negative shocks,” the report says. “… we expect a negative return about once in every three years.”
According to the ACC forecasts, based on current portfolio allocations, if equity markets fall just 3.5 per cent in a financial year the local fixed income-heavy fund would likely experience negative returns.
While rising bond yields would also damage portfolio performance, the financial position of the ACC entity improves under that scenario as the claims liability decreases “by an even greater amount than the decline in investment returns”, the report says.
In fact, the point was proved during the 12 months to June 30 as the ACC reported a $10 billion surplus, aided in part by rising interest rates reducing the no-fault accident insurer’s outstanding claims liabilities (OCL) by over $6 billion.
Over the same period, the ACC’s fixed income portfolio – equating to about half of the total $50 billion fund – reported losses ranging from more than -3.5 per cent (for NZ government bonds) to the global fixed income decline of -1.7 per cent.
Despite the bond hit (though, the fixed income returns remained above benchmark), the overall fund “produced an excellent 10.4% return for the year, boosted by a strong equity performance, overall outperforming our benchmark by 1.9% versus a target outperformance of 0.15%”.
“Investment returns contributed $4.8 billion to our surplus,” the report says.
Total investment management costs rose to over $71 million for the 12-month period (including external manager fees and in-house staff expenses), equating to 0.14 per cent of fund assets as at June 30.
The ACC manages about 70 per cent of all assets in-house including local fixed income, NZ shares and most Australian equities. More recently, the fund took some global equities in-house, however, much of that was later outsourced to former ACC chief investment officer, Nicholas Bagnall, who won an estimated $1.6 billion international shares mandate late in 2019 when launching the boutique Te Ahumairangi Investment Management (TAIM).
TAIM was locked into a one-year exclusivity contract with the ACC, which recently expired, freeing Bagnall to pursue other clients for his value-based global shares strategy.
As at 2019, the ACC external international equities managers included: Alliance Bernstein; Arrowstreet; Harding Loevner; Intermede Investment Partners; Marathon Asset Management; Orbis Investment Management; Paradice Investment Management; and, Wells Capital.
“Our investments in global equities outperformed their benchmarks. There was strong performance in most portfolios.
In general our external managers that performed well in the first few months of the year had a more challenging period for the remainder of the year, as investors shifted their focus from high-quality businesses with good growth prospects towards companies that were numerically cheap,” the ACC report says. “Conversely, our external managers that had a challenging start to the year outperformed in the remainder of the year. Six of the global equity portfolios outperformed their benchmarks, with two equity portfolios underperforming their indexes.”
The ACC report also reveals the fund, now featuring Paul Dyer as chief investment officer, has ramped up its climate change strategy, cutting portfolio carbon exposure by some 45 per cent and reporting to the Taskforce on Climate-related Financial Disclosures (TCFD) standards for the first time this year.
As well as the broad portfolio alignment to sustainability goals, the ACC has recently created two impact investment vehicles – the Health and Safety Impact Fund and the Climate Change Impact Fund – both seeded with $50 million.
“We believe there are opportunities to deliver superior risk-adjusted returns as well as have a measurable positive impact on the lives of New Zealanders,” the report says.
In September, Megan Main, was named to replace Scott Pickering as ACC chief. Main, who was in charge of the government’s COVID-19 managed isolation and quarantine group, takes up the new job in November.
The ACC board has also been refreshed this year with Steve Maharey, replacing the long-serving, Paula Rebstock, as chair this August.
And in July, two NZ fund management luminaries – Paul Richardson and Amanda Smith – joined the ACC investment committee as veteran, Pat Duignan, retired.