The NZ Superannuation Fund (NZS) has removed about 7,400 companies from its passive global equities universe following the shift to a low-carbon index reported last week.
According to a NZS spokesperson, the updated passive international shares component of the fund’s reference portfolio now holds only about 1,100 stocks compared to the 8,500 companies in its previous hand-crafted global equities benchmark.
“In terms of the actual portfolio, the Fund now holds those 1,100 passive securities plus a further 2,000 or so actively invested stocks,” the spokesperson said. “The Fund holds these companies both directly and via derivative exposure.”
As at June 30 this year the NZS directly owned about 3,200 global shares compared to 4,500 at the end of 2021. Total offshore equities direct holdings are expected to fall further given the transition away from the former bespoke index continued past June 30.
The index shift affects $25 billion of global share holdings, or about 40 per cent of the NZS portfolio.
Moving to off-the-peg benchmarks based on MSCI Climate Paris Aligned Benchmark Select Indexes for passive offshore shares should bring implementation efficiencies and lower costs without hitting returns or diversification, the spokesperson said.
“Our analysis suggests that historically, the new benchmark indices would have delivered superior financial returns to our previous index. We’re also comfortable the new indexes are expected to deliver the required financial characteristics, and a market-like return – i.e. they do not generate excess tracking error or unacceptable changes to factor, geographic, or sector exposures.”
But the NZS will keep monitoring and reporting actual and reference portfolio performance against broader market indices.
“We intend to report in the future as to whether the benchmark change adds or detracts to Fund performance (i.e. compare it against MSCI ACWI),” the spokesperson said.
In a release last week, NZS chief investment officer, Stephen Gilmore, said the new global shares benchmark would help the fund hit climate targets as well as improving other environmental, social and governance (ESG) measures
“A smaller, more concentrated portfolio will be cheaper to run, and more manageable for us when looking to identify and engage on responsible investment issues,” Gilmore said.
The NZS has been a global leader in cutting carbon emissions from its portfolio, looking to accelerate the pace of change in recent years following both government direction and internal analysis.
According to the spokesperson, the new global shares index cuts exposure to companies prone to physical climate change risks in half compared to the unadulterated MSCI benchmark. At the same time, the Paris-aligned index underweights stocks facing climate transition risks while tilting to those with “credible carbon reduction targets”.
“The Indexes are rebalanced on a semi-annual basis and have a 10 percent year-on-year decarbonisation constraint meaning they will continue to deliver greater carbon exposure reductions than our previous methodology,” the spokesperson said.
NZS has outsourced passive global shares to a raft of managers including UBS and State Street. The fund also has a significant allocation to factor-based global share portfolios run, or advised, by Northern Trust, AQR and Robeco, which are not affected by the index change.
“In the year ahead we will look at how we can continue to improve the ESG profile of our factors mandates,” the spokesperson said. “Our factors managers are already tasked with matching our carbon reduction targets.”
Last week the NZS reported a loss of almost 7 per cent for the 12 months to the end of June compared to -14.4 per cent for the notional reference portfolio return over the same period.
Matt Whineray, NZS chief, said in a release that “our active investment strategies have performed extremely well and are a reflection of the excellent work and skill of the team over many years”.