For just the third time in its 31-year history the Accident Compensation Corporation (ACC) fund dipped below benchmark during an official reporting period but remains well ahead on points over the long term.
The ACC annual report released last week shows the now $47 billion plus investment portfolio was up 7.25 per cent in gross terms for the 12 months to June 30 compared to its composite benchmark return of 7.27 per cent.
After costs (including $85.5 million of internal and external investment expenses) the fund returned 7.07 per cent. The 0.2 per cent benchmark miss is about in line, too, with the NZ Superannuation Fund (NZS) performance, which fell 0.16 per cent short of its reference portfolio for the 12 months ending June 30.
The result also marked a return to positive territory following the ACC’s second (and by far, biggest) loss in the 2022 financial year of about -9.2 per cent, which was nonetheless above index.
Inflation-linked bonds and global equities – the two biggest ACC allocations of $12.7 billion and $12.1 billion, respectively – both underperformed benchmarks but provided strong nominal returns of 5.5 per cent and almost 18.2 per cent.
However, the nominal NZ bonds, local equities and Australian share portfolios all outperformed. The fund eked out a positive return for its local vanilla bond holdings (the third-largest holding in the portfolio at $10.2 billion) of 0.53 per cent against the index -0.16 per cent.
“Active management added value and produced a modestly positive return for ACC’s nominal bond portfolio. This was largely due to the compensation for taking credit risk and the management of interest rate risk,” the report says. “The manager expects yields to rise further so is therefore positioned for this.”
The ACC NZ shares (almost 8.4 per cent) and Australian equities (12.55 per cent) holdings finished above-benchmark with both portfolios now managed completely in-house.
“During the year we consolidated the management of all our Australian investments under the Wellington-based Investment Team,” the report says.
However, the ACC panel of eight external global equities managers remains unchanged, according to chief investment officer, Paul Dyer.
“We have been successful in getting good performance from our external managers,” Dyer said. “We take care in selecting them and are loyal: turnover is rare.”
As at 2019, the ACC third-party global share managers included Alliance Bernstein; Arrowstreet; Harding Loevner; Intermede Investment Partners; Marathon Asset Management; Orbis Investment Management; and, Wells Capital.
In 2020 the ACC handed a then $1.8 billion international shares mandate to ex CIO Nicholas Bagnall via his Te Ahumairangi Investment Management fund. Bagnall previously ran a global equities allocation in-house for the ACC.
The 2023 report also shows the fund’s private market portfolio now stands at almost $2.2 billion while returning 0.3 per cent over the 12-month period.
“ACC’s private market investment activities span property, infrastructure, private equity, and debt, and more recently have started impact investing in the health and safety and decarbonisation sectors,” the report says. “ACC holds assets in Australasia, both directly and in funds.”
Since inception in 1992 the fund had returned 9.31 per cent versus just over 8 per cent for the benchmark.
Dyer said the fund tends to be a “contrarian investor” with a long-term view centred on matching the liabilities of the no-faults accident insurance scheme.
More recently, the ACC has re-tuned its portfolio to government climate change specification, meeting the target of reducing carbon exposure to 60 per cent of the 2019 level well ahead of the 2025 deadline.
The shift to carbon-lite investing “hasn’t impacted performance so far”, Dyer said.
“Long-term we expect there will be a small performance difference,” he said.
The fund is also preparing for its first independent external review of investment operations slated for 2025.
Unlike other Crown Financial Institutions such as the NZS, the ACC fund does not have a statutory duty to face regular reviews from third-party experts.
“We’re doing this voluntarily because it is good investment practice,” he said.
Treasury is expected to launch a formal search for an ACC reviewer later next year, similar to the process for the latest NZS five-year statutory review that has just closed for tenders.