The Accident Compensation Corporation (ACC) has confirmed Paul Dyer as the permanent chief investment officer (CIO) for its almost $47 billion fund, replacing long-time incumbent, Nicholas Bagnall.
Bagnall resigned from the ACC late last year to launch his own boutique – Te Ahumairangi Investment Management (TAIM) – seeded with a now $1.8 billion global equities mandate from his old employer.
Dyer, who has been advising the ACC fund for several years, now returns to full CIO status, a role he held at the similarly sized NZ Superannuation Fund for almost four years ending 2008.
In the ACC annual report released last week, the government organisation saluted Bagnall for a 27-year effort that saw “assets under management grew from $1.05 billion in 1993 to $46.7 billion in 2020”.
“Returns averaged 9.83% per annum during this time, aided in no small part by a long, unbroken sequence of performance exceeding the fund’s benchmarks,” the report says. “Under Nicholas’ leadership, the ACC investment team was extremely successful in earning investment income that significantly reduced the cost of levies New Zealanders had to pay for accident cover.”
But in a close repeat of last year’s result, the ACC fund clocked up above-budget nominal returns but missed its after-costs benchmark targets by a smidgeon.
Overall, the fund returned 7.59 per cent in the 12 months to June 30, generating income of $3.4 billion or more than $1.8 billion above forecast, according to an ACC release.
While the fund outperformed its bespoke benchmark by 0.16 per cent after costs, the result fell just shy of the ACC’s 0.3 per cent outperformance target.
Last year the ACC fund added over $3.5 billion more than expected to the kitty but undershot the benchmark by 0.7 per cent.
As per the 2019 result, most of the ACC investment gains in the latest annual period were sheeted home to falling interest rates, which lifted the fund’s bond portfolio values. The ACC allocates about 60 per cent to fixed income, including almost 50 per cent of the total portfolio in NZ bonds.
But the annual report says “volatility in investment markets caused by COVID-19 provided opportunities for ACC to invest in markets where we saw more attractive long-term returns being possible”.
“This resulted in a reallocation of funds from our fixed-interest portfolios into equity assets,” the report says.
Compared to last year, the ACC global equity allocation has increased from 16 per cent to 22 per cent as total NZ bond holdings (including inflation-linked) dropped from 56 per cent to 49 per cent. During the same period the fund also added slightly to private assets and global bonds while dialing down cash from 6 per cent to 4 per cent as at June 30 this year.
The ACC outperformed both local and global fixed income benchmarks but missed its global and local equities indices, particularly in NZ shares where the fund was up 4.14 per cent versus the benchmark 6.3 per cent.
“ACC’s investments in New Zealand listed equities underperformed the benchmark index. Investments that detracted from our performance included Z Energy and Sky TV,” the report says. “Relative performance (i.e. compared to the index) also suffered as we held a lower-than-benchmark investment in Fisher & Paykel Healthcare.”
The fund fared better in Australian equities where all underlying managers beat the benchmark “led by a strong performance by the internally managed Large Capitalisation Fund”.
Despite the solid investment performance, rising interest rates blew out the no-fault national accident insurer’s outstanding claims liability (OCL) to $61 billion, contributing to a net annual deficit of $5.9 billion.
In a statement, Paula Rebstock, ACC chair, said: “This deficit is not a cash loss; it is an accounting or actuarial revaluation of the future cost of claims. Over the same period, we recorded a $414 million cash operating surplus, which demonstrates ACC’s funding structure is robust and able to withstand short-term volatility, including falling interest rates.”
ACC levies may have to rise in the medium term, Rebstock said, to cover the growing shortfall in a low interest rate environment.
The report says: “Our investment strategy cannot fully protect us against these interest rate impacts on the OCL. There is a large duration mismatch between our assets and liabilities. Our OCL extends up to 100 years, with the average duration of a claim around 20 years.
“This far exceeds the duration of available New-Zealand dollar investments, where our average fixed-income investments have a duration of around ten years. These are supplemented to a degree by investments in areas such as property and infrastructure, but the mismatch remains.”