The NZ Superannuation Fund (NZS) could increase both the size and diversity of its factor-based global equity investments, according to recently-appointed chief executive, Matt Whineray.
Whineray, who took over the top job this June, said the ‘smart beta’ international share mandates – awarded to Northern Trust and AQR in 2016 and 2017, respectively – have performed “as expected” since debut, giving the $40 billion fund confidence to expand the strategies.
“We are looking to increase the size of the factor investments,” he said. “And we’re also considering what other factors might have potential.”
NZS awarded Northern Trust a $600 million factor mandate in 2016 with AQR picking up a similar $500 million contract the following year. Both mandates were originally split into two portfolios each, targeting value and low-volatility stocks.
However, Whineray said the both factors were recently combined into single portfolios managed by AQR and Northern Trust.
The fund is reportedly considering a new ‘multi-factor’ global equity mandate.
About half of institutional investors globally had allocated to factor strategies, according to the latest FTSE Russell ‘smart beta’ survey, with the trend set to pick up further.
The NZS describes smart beta investing as “systematically constructing an alternative to a passive, market capitalisation index by weighting towards companies possessing pre-determined factors”.
“These factors are expected to deliver superior risk-adjusted returns for investors over the long-term,” the NZS says.
As at the end of June the NZS had about 65 per cent of its then $39.37 billion portfolio invested in passive global equities – equating to about $25.6 billion.
Whineray said with rising concerns about market valuations the fund had also increased exposure to liquid assets – a definition that includes sovereign bonds and global equities – as a defensive measure.
“We’re keeping our powder dry so if there is significant volatility we have room to take advantage of it,” he said.
Over the 12 months to June 30 the NZS reported returns of 12.43 per cent, outperforming both the reference portfolio (by more than 2 per cent) while adding almost 11 per cent above its other benchmark, NZ Treasury bills. Since inception, the NZS returned an annual 10.4 per cent, or almost 1.5 per cent more than the passive reference portfolio.
Portfolio ‘tilts’, investment in timber assets and an internally-managed credit mandate all contributed to the fund’s outperformance compared to the reference portfolio, the NZS says.
Despite the rosy performance figures, Whineray said gathering global and local risks could see the fund facing lower – or even negative – returns ahead.
He said while the risks had been well-articulated in theory, the NZS would inevitably face public pressure if volatility hit the portfolio.
“The main risk is that we don’t have the discipline or resolve to maintain our strategy. Or if we lose the support of our sponsor,” Whineray said.
Since the new Labour-led government came into power last September, the NZS had also been topped up to the tune of $500 million through government transfers – currently set at about $90 million per month but due to rise over the next few years.
The-then National government stopped NZS installments in 2009 in the wake of the global financial crisis.