The NZ Superannuation Fund (NZS) has hired three new external manager this year with UBS picking up an almost $5 billion passive equities mandate.
According to the NZS annual report released last week, UBS will manage two of the fund’s passive global shares strategies including a new “customised MSCI large cap equity index” and a multi-factor portfolio advised by Dutch manager, Robeco.
“UBS Asset Management’s objective is to manage the portfolio to closely replicate the MSCI and Robeco indices provided in terms of underlying portfolio and performance return,” the report says. “The combined size of these two equity mandates is approximately $4.9 billion and is expected to grow over time.”
As reported earlier this year, the now $58 billion plus fund appointed Robeco in 2020 to construct a bespoke multi-factor developed market global shares index, leaving NZS to implement through a mix of in-house and third-party resources in a move providing “significant liquidity advantages”, a spokesperson said at the time.
UBS joins State Street, Northern Trust and AQR in managing the fund’s indexed or factor-based offshore shares strategies, which collectively represent the majority of NZ assets.
During the 12-month period, the NZS also rationalised its global equities exposure, slashing direct holdings from 6,700 stocks to 3,800 while keeping the overall exposure to “many small listed companies synthetically (via swaps)”.
“The move has a number of benefits including reduced trading costs, improved Fund liquidity, simpler currency hedging and reduced complexity,” a NZS release says. “It will not impact upon portfolio diversification.”
Meanwhile, the fund reported about $2.6 billion in listed NZ equities as at the end of June split between two external managers – Mint ($537 million) and Devon ($423 million) – with the remainder managed in-house through passive and active portfolios.
“… while our New Zealand active equities mandate underperformed its benchmark this year, our internal team and externally appointed managers have added significant value since inception,” the report says.
In addition to UBS, the sovereign wealth fund earmarked investments in two unlisted real estate funds – an Asian vehicle offered by CBRE Global Investors and a European product run by Deutsche Finance International – as well as naming Columbia Capital to run a second telecommunications spectrum mandate after hiring Grain Management late last year.
“Given the specialist nature of this field and the associated complexities of the auction processes, we have appointed two specialist investment managers, Grain Management and Columbia Capital, to participate in auctions to acquire spectrum via pooled investment vehicles on our behalf at competitive rates,” the NZS report says.
Overall, the fund returned almost 30 per cent for the 12 months to June 30, 1.7 per cent above its passive reference portfolio and about 29.4 per cent more than the benchmark government treasury bills. Since inception in 2003, the NZS has returned almost 10.7 per cent annualised, beating the reference portfolio by 1.2 per cent plus and earning over 7.1 per cent each year above the cost of government debt.
“Our expectation, given our current active risk settings, is that over rolling 20-year periods the Fund will be able to add an extra 1.0% p.a. above the returns associated with the passive Reference Portfolio because of our active investment strategies,” the report says.
In dollar terms since establishment, the NZS has received about $20 billion in government contributions, paid out $7.5 billion in tax while delivering returns almost $40 billion above short-term treasury bills and more than $10.6 billion above the reference portfolio.
But the NZS fund has become increasingly complex over the years both investment-wise and operationally with a number of initiatives slated for this financial year such as:
- increasing exposure to infrastructure – hiring Josie McVitty this March to review the strategy and embarking on a new financing model for NZ assets dubbed ‘Superbuild’;
- creating a new in-house tactical credit mandate;
- fleshing out the Elevate venture capital strategy – the NZS has governance responsibility for the fund managed by fellow government agency, Capital Growth Partners; and.
- upgrading its responsible investment strategy to a new “sustainable finance” model following a review completed this year.
“Where the focus of responsible investment is the management of ESG risks on our investments, sustainable finance involves consideration of the impact of our investments on the environment and society,” the NZS report says. “Through sustainable finance, the finance sector is becoming an important part of the global effort to transition towards a low-carbon and sustainable economy. As part of this trend, it is clear that investors will be expected to report on how they are addressing sustainability in their investment strategy.”
Despite the growing complexity and extra duties, staff numbers remained stable – and under budget – over the year at about 160 (rising by just six full-time employees for the period).
Total NZS expenses also declined slightly year-on-year to about $131 million from over $132 million in the 2020 period, falling proportionately against assets under management to 0.26 per cent (0.3 per cent last year). Most of the cost savings came through reduced spending on professional advisers ($5.5 million compared to $12.4 million last year) and fewer ‘trade expenses’ (down to $7.6 million from almost $13 million in the previous period).
Base fees paid to third-party managers inched up slightly to $36.7 million from $35.4 million in 2020 while performance fees leapt to $7.3 million against $2.3 million last year.
Staff costs were up $5 million year-on-year on the back of “an increase in bonus accrual” and the slight uptick in employee numbers.
The performance-related bonus system saw two NZS employees jump into the $900,000 plus annual remuneration bracket with chief, Matthew Whineray, pocketing just $4,000 shy of $1 million compared to $928,000 last year.
Remuneration for previous NZS head, Adrian Orr, peaked at $1.2 million in the 2016/17 year, dropping a little to $1 million in the ensuing period.