The $4.2 billion Government Superannuation Fund (GSF) has launched an independent review of its investment strategy after a poor two-year run has seen the scheme slip behind reference portfolio targets over all periods.
According to the recently published GSF annual report, the offshore equities-heavy fund was down -1.7 per cent for the 12 months to June 30 against the passive reference portfolio return of 4.5 per cent and 5.7 per cent for NZ government bonds.
“Whilst the under-performance for the last two years has reduced the Fund’s average investment return over the last 10 years back to 8.6% per annum net of fees, 1.0% behind the Reference Portfolio, it remains ahead of that from New Zealand Government bonds by 3.2%,” the GSF report says. Since inception around 2001, the GSF portfolio – managed by Annuitas – returned 6.7 per cent – or 0.5 per cent under the reference portfolio.
“The Board believes its investment strategy remains appropriate. Nevertheless, given recent performance of the Fund and in the light of heightened economic uncertainty and recent market turbulence, the Board has commissioned an independent review of its investment strategy,” the report says. “This review will also provide information for the Government’s five yearly statutory review of the Fund in 2021.”
GSF performance was hit by poor returns from global shares (compared to bonds) as well as its actively managed strategies lagging “returns from equity market indices almost entirely due to increasing prices paid for technology stocks”.
“While these exposures have hurt relative performance, the Authority has maintained the positions in the expectation that investors’ expectations of future growth in these large cap internet-based stocks will normalise at some point,” the report says.
The effect was amplified over the last two years as the GSF increased its reference (and actual) portfolio exposure to global equities, raising the target allocation 10 per cent to reach 70 per cent while dialing down offshore bonds by the same quantum to 20 per cent.
“This shift increased the Fund’s expected return and risk so the Reference Portfolio is now expected to outperform New Zealand Government bonds by 4% pa over the next 10 years,” the 2020 report says.
During the reporting period (and post balance date), the GSF has also made several manager changes, namely: firing global equities managers Marathon and PanAgora; while appointing two Australian-based global share funds managed by T Rowe Price and Hyperion Asset Management.
In September, the GSF also terminated ANZ as a currency hedge manager leaving State Street as the sole provider of this service.
The GSF board, chaired by Anne Blackburn, saw two exits during the financial year – Michelle van Gaalen and Shelley Cave – replaced by Michael Sang and Financial Markets Authority director capital markets, Sarah Vrede. Previously head of the NZ Debt Management Office, Vrede also serves on the GSF investment committee with chair Murray Brown and Alison O’Connell.
The GSF, created to help fill the fiscal hole by historical public servant defined benefit pensions, recorded a pre-tax after-costs deficit of over $82 million in the 12 months to June 30 “against a forecasted surplus of $275.505 million”.