NZ’s two biggest sovereign wealth funds have moved impact investing up the agenda during a year where both reported benchmark-beating losses.
In their respective annual reports released last week, the NZ Superannuation Fund (NZS) and the Accident Compensation Corporation fund (ACC) earmark impact investments for more attention in the years ahead.
“We have developed a plan to increase the number and scale of impact investments by the Fund and to continue to integrate impact into our investment processes. This work is focused on the Fund’s direct investments,” the NZS report says.
“We intend to set a high bar for impact investments. For an investment to qualify as an impact investment it must have a specific, meaningful and credible impact that we will measure and report on.”
At the same time, the ACC report notes progress in its impact portfolios including seed investments in the new $100 million climate change fund.
The ACC Climate Change Fund has made its first punt on Leaft Foods, “a start-up that extracts a protein called Rubisco from green leaf crops and offers farmers a way to diversify away from more carbon-intensive food production”, the report says, with another solar energy-based investment expected soon.
“We developed a framework to assess the impact our investments in this fund are making,” the ACC report says.
Impact investing typically elevates specific social or environmental goals on a par, or higher, than financial returns.
But financial returns have been hard to come by in general during the 12 months to June 30 as both NZS and ACC posted losses of almost -7 per cent and -9.21 per cent, respectively – the latter representing the worst nominal performance for 20 years.
Despite the red-ink results the two government-owned funds beat their benchmarks: by 7.25 per cent in the case of NZS and just over 1 per cent (before costs) for the ACC fund.
Both NZS and ACC attribute the 2021/22 outperformance to their active management positions, which vary widely between the two funds.
Paul Dyer, ACC chief investment officer, said in the report: “The other pleasing aspect of the year was the success of ACC’s active management strategies. Returns to most portfolios, including our domestic equities, bonds and private markets, exceeded benchmarks. The sole major asset class that underperformed was global equities, and even here there was a wide range of outcomes between value and growth managers.
“Adding value to investments over and above benchmark returns is a key performance measure for our team. In this regard, ACC was highly successful. Active returns were about 1.09% above benchmark in 2022, corresponding to about $500 million of added value. This is above our longer run expected performance from active management and represents a solid outcome for the year.”
Similarly, the NZS report says active management – conducted both in-house and through external managers across multiple strategies – added some 6.71 per cent above the reference portfolio returns for the 12-month period.
However, for the now $56 billion NZS (which peaked at above $61 billion last year), total running costs more than doubled over the 12 months to $278 million – mostly on the back of a spike in external manager performance fees to $131 million from $7.4 million in the previous reporting period.
NZS employee costs also jumped $10 million to hit $54.8 million as staff numbers rose to 188 (161 as at June 2021) and performance measures triggered a bonus gush that pushed the take-home pay of chief executive, Matt Whineray, to a record $1.4 million.
“Consequently, as a percentage of average net assets, costs increased from 0.25% in the prior year to 0.49% in the current year,” the NZ Super report says.
ACC investment costs increased slightly to $80 million from $77 million in the 2021 year, equating to 0.15 per cent of assets under management.
The ACC fund took its biggest hit on the almost $10 billion NZ bond portfolio, which fell close to 12.6 per cent over the 12 months in mark-to-market losses as interest rates surged higher: total funds under management dropped from above $50 billion to $44.8 billion as at June 30 this year.
On the flipside, rising interest rates reduced the overall long-term liabilities of the ACC, leaving the no-faults accident insurance scheme about even after accounting for investment losses.