
The New Zealand Superannuation Fund (NZS) will measure performance against a new reference portfolio following its $950 million switch to carbon-lite investing.
Under the changes both the new carbon elements and other previously-implemented environmental, social and governance (ESG) exclusions will be included in the reference portfolio – one of the two NZS investment performance metrics.
Until now, earlier NZS responsible investment exclusions such as “tobacco, whaling, nuclear explosive devices, cluster munitions and individual breaches of standards” were not incorporated in the reference portfolio due to “cost reasons”, the NZS explanatory document says.
An NZS spokesperson said the updated reference portfolio would involve “a small ongoing cost to the provider of the custom benchmark”.
“We have retained our existing passive manager fee structures,” the spokesperson said. Currently, NZS uses Northern Trust, BlackRock and State Street to manage the passive global equities portfolios affected by the new carbon-rinsing policy.
Last week the NZS revealed it had completed an almost $1 billion revamp of its global equities holdings involving almost 300 underlying companies (including two NZ firms – Genesis Energy and NZ Oil and Gas), which incurred some implementation costs, the spokesperson said.
“The physical low carbon transition, which involved selling 297 stocks and reallocating $950m throughout the rest of the passive portfolio, was essentially a one-off cost,” the spokesperson said. “While we will reapply the carbon rules to the portfolio annually, and this will result in some stocks being added or removed from the portfolio, future changes will not be of the magnitude of this year’s, and costs are not expected to be material.”
The NZS reference portfolio tracks returns of an idealised passively-held pool of investments designed to match the fund’s broad asset allocation. According to the NZS website, the reference portfolio is used to map out expected future returns, set a benchmark for active returns, and “be clear on the ‘hurdles’ for active investments”.
Whether ESG funds should measure themselves against an unrefined index or a bespoke version remains a matter for debate in the industry, but the NZS says the reference portfolio change reflects the fact it “wouldn’t include those stocks we have decided to exclude”.
“[The change] ensures the Reference Portfolio is fit for purpose given the requirements in our mandate to maximise returns without undue risk to the Fund as a whole, and to not prejudice New Zealand’s reputation in the global community,” the NZS says.
The reference portfolio is due for its next official five-year review in 2020 when “the impact of the changes on returns will be considered”.
After implementing the equities reform – mostly completed this June – the NZS biggest actual portfolio sector reweight has seen energy stock holdings drop by 2.1 per cent. The NZS also pared back weightings to utilities, materials, industrials and consumer staples have also been pared back – albeit at levels between -0.2 and -0.5 per cent.
Meanwhile, information technology saw the biggest overweight move (up 1.3 per cent) followed by financials (1 per cent) with healthcare, consumer discretionary and telecoms also gaining slightly more heft in the NZS portfolio.
In a statement, NZS chief investment officer, Matt Whineray, said: “By targeting this group we have been able to significantly reduce the Fund’s carbon footprint while retaining the diversification benefits of passive investment.”