The $42 billion NZ Superannuation Fund (NZS) is close to making a “sizeable” allocation to new factor strategies, according to chief economist, Mike Frith.
Frith said after running a relatively small factor exposure through external managers AQR and Northern Trust over the last couple of years, NZS has “built confidence” in the approach.
While the fund flagged a factor multiplication some time ago, he said the portfolio move was now imminent, either through existing mandates, new managers, or both.
“We have been looking at a couple of new managers,” Frith said. “There are some internal constraints on how much we are exposed to a single manager.”
NZS awarded Northern Trust a $600 million mandate in 2016 targeting low volatility and value factors before granting AQR a similar $500 million gig the following year.
“Even though our two factor managers have a similar mandate they have built different portfolios,” Frith said.
According to the 2018 NZS annual report, the AQR and Northern Trust factor portfolios were valued at $918 million and $770 million, respectively, as at March 31 last year.
In total the two factor mandates represent about 4 per cent of NZS assets. Northern Trust manages a further $8 billion or so of NZS money in more standard equity and fixed income passive vehicles. NZS also investments a much smaller amount (just over $30 million) in an AQR convertible arbitrage fund.
Frith said NZS was considering a range of different factors including the increasingly popular multi-factor method.
“Adding factor exposures will help diversify the fund without taking on any more risk,” he said. “In fact, we think factors reduce portfolio risk a little over the long term.”
The current NZS factor tilts have performed as expected, Frith said. Since adding the AQR and Northern Trust mandates, value has underperformed while low volatility has beat the wider global equity index, he said.
Despite the looming factor enhancement and a number of direct investments implemented over the last year, the fund had moved closer to its passive reference portfolio, Frith said in a NZ ‘Investment environment report’ last week.
“The amount of active risk we’re running is quite a bit below what we would run on average across a cycle,” he said.
Most markets were fully-priced as central bank-pumped liquidity floated just about all assets to new highs, Firth said.
“… it’s harder and harder for us to lean into markets,” he said.
But while there were few bargains on the table for investors, Frith said the rising global recession chatter may be premature.
“We’re not picking a big growth meltdown,” he said. “… maybe there’s a moderate growth fatigue.”
However, Frith said investment returns over the next couple of years would probably be a tad lower than the recent past.
The NZS was on track, though, to post a decent return for the 12 months to June 30 after a reasonably bumpy year.
End-of-year returns had yet to be finalised but Frith said the NZS performance for the period “looks OK”.
“The fund dropped 10 percent in the fourth quarter of 2018, but got it all back the following quarter. May saw a 4 percent drop, which reversed out in June.”
Since inception in 2003, the fund has returned 9.9 per cent after costs (but before tax), according to the NZS website, which now shows a running ticker of estimated assets under management – flickering late last week between $42.2 billion and $42.4 billion.