The New Zealand Superannuation Fund (NZS) could see staff numbers rise to almost 125 this financial year as it gears up for broader in-house investment responsibilities.
In its just-released annual report, the NZS records employee levels of 113 (or 111 full-time equivalent staff), up from 69 in 2011.
According to an NZS spokesperson, the fund was aiming to add an extra 10 full-time employees this year to bolster its internal investment teams.
“Building the capability of our in-house team is consistent with our desire to maximise net returns – ie returns after all costs,” the spokesperson said. “Overall fund expenses are, however, projected to decrease over the coming year.”
NZS staff expenses hit $28 million over the 2014/15 year, up $2.5 million on the previous annual period.
“As a proportion of funds under management, however, these costs remained stable at 0.10 per cent,” the NZS report says.
The report lists 15 internally-managed mandates including: NZ equities (passive and active); infrastructure; cash; direct arbitrage; US transition assets; global inflation-linked bonds; emerging market opportunity; and, volatility.
“Globally, there is an increasing trend towards in-house investment, with asset owners looking to manage costs and retain maximum control over their capital,” the NZS spokesperson said. “External managers will, however, always have an important role to play. It’s important to note that we only look to manage investments internally when we can be sure we have the capability, and that there is a good commercial case to do so.”
The report shows State Street Global Advisors has the single largest external NZS mandate of almost $5.4 billion in “bespoke global listed passive equities”, representing over 18 per cent of the fund’s total assets.
However, BlackRock manages the largest overall share of NZS assets with almost $5.9 billion split between global passive fixed income and equities mandates – or 19.9 per cent of the fund’s value as at June 30 this year. BlackRock was awarded a third mandate in 2014 covering active emerging market fixed income that was a nil balance as at the NZS report date.
Northern Trust, which doubles as NZS custodian, was the third largest external manager for NZS, running some $4.8 billion (or 16.1 per cent of total fund assets) across three passive equity and fixed income mandates.
Collectively, the three global managers account for more than 54 per cent of NZS assets, which contributed to fund losses in August of 4.3 per cent.
After NZS assets jumped above $30 billion for the first time in July (hitting $30.1 billion), the fund slumped to $28.79 billion as at the end of August following volatility on global equity markets.
As at June 30, however, the NZS reported funds under management of $29.54 billion, up about $3.1 billion on a pre-tax basis. Over the year the fund incurred NZ tax liabilities of $122.65 million, or an effective tax rate of 3.18 per cent, down from almost $1.1 billion (25.18 per cent effective tax rate) in the previous period.
The NZS attributed the massive tax downgrade to the strong returns during the year from global equities, which are taxed under the Fair Dividend Regime (FDR) only on a deemed dividend of 5 per cent.
According to the NZS accounts, the FDR rules resulted in about $800 million deducted from the potential tax bill of over $1 billion if the fund’s total return of $3.8 billion had been taxed at 28 per cent. The fund’s portfolio investment entity (PIE) holdings also saw about $105 million knocked off the hypothetical fully-taxed amount.
However, the fund also reduced tax costs by shifting some of its global equity exposure from derivatives to physical investments over the year.
“The balance between physical and synthetic access points is driven by investment decisions made in respect of our actual portfolio without reference to tax,” the NZS spokesperson said. “However, as a general comment, we would expect the change in the physicals/synthetics balance would make up a reasonably small proportion of the change in the effective tax rate.”