The almost $4.4 billion Government Superannuation Fund (GSF) missed its reference portfolio by more than half over the 12 months ending June 30, stung by under-performing exotic assets and a multi-factor mis-fire.
According to the 2019 GSF annual report released last week, the fund, set up to partly defray the cost of government employee pensions, returned 3.6 per cent after fees (but before tax) over the 12-month period compared to 7.7 per cent for the reference portfolio.
Following the latest annual result the GSF also slipped under its benchmark for the three-, five- and 10-year periods.
“The main driver of the subpar performance was the Fund’s exposure to alternative assets,” the GSF report says. Almost 20 per cent of the fund is invested in insurance-linked assets (catastrophe bonds and life settlement products) and a multi-factor ‘style premia’ portfolio managed by AQR Capital.
The life settlements portfolio – which invests into pools of individual life insurance policies via Apollo Global Management and Credit Suisse vehicles – was down about 23 per cent for the year while the $420 million AQR fund fell 10.6 per cent over the same period.
“Alternative risk premia suffered from poor returns from the ‘value’ factor in large cap global equity markets without any offsetting gain from other factors that are normally useful, such as quality, momentum and yield,” the GSF report says. The GSF, which outsources investment management to the Wellington-based Annuitas, almost doubled its allocation to the AQR factor fund during the year.
As well, the GSF’s close to $250 million catastrophe bond holdings – managed by Fermat Capital and Nephila Capital – dropped over 3 per cent.
“Despite a bad year, the Board is satisfied these alternative assets remain appropriate to the Fund’s objectives,” the annual report says.
But it wasn’t just the offbeat assets that let the GSF down over the year, the report says, as “external equities managers, both global and domestic, had a poor year too, subtracting a further 0.9% from the Reference Portfolio”.
Last year the GSF embarked on an up-risking of the investment fund that will ultimately split the reference portfolio between 80 per cent in global equities and the remainder in offshore bonds. Currently, the reference portfolio settings are 65 per cent international shares, 10 per cent NZ equities and 25 per cent global fixed income.
Anne Blackburn, GSF chair, says in the report that the board approved changes to the actual portfolio during the year including an “increased exposure to alternative assets, diversifying return sources through a multi-factor, multi-asset class, equity market neutral ‘style premium’ fund”.
“It is also increasing its commitments to global private equity over several years and implemented a long-short strategy with one of its existing global equities managers to capture an increased return from their skill at picking stocks,” Blackburn says.
While no new GSF mandates were awarded during the latest reporting year, the fund cut three managers over the period: the AMP Capital commodities exposure; and, two global bond portfolios managed by Ashmore Investment and Wellington Management Australia.
The GSF chalked up operating expenses of roughly $44.6 million over the fiscal period (down slightly year-on-year), most of which is reimbursed directly from the government coffers.
“In calendar 2018 costs were in line with global peers of similar size and risk profile,” the GSF report says. “Over the 5 years to December 2018 the Fund’s performance was ahead of peers in terms of value added while costs of 88bp were 10bp above peers on account of larger allocations to private equity. Manager fees also compare favourably against NZ peers.”
Established in 2001, the GSF is intended to take the edge off the huge government employee pension bill incurred in a number of defined benefit schemes that closed to new members in the 1990s.
The government employee retirement benefit promises amount to almost $12.6 billion with a current funding shortfall of just over $8 billion, the GSF report shows.
In total, 51,553 individuals are covered by the government defined benefit scheme, of which only 7,136 are still contributors: the remaining 44,417 members are in pension phase.