Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Israel’s can of worms for NZ Super and others
NZ Super’s guardians and management are used to their fair share of lobbying by special interest groups, but the latest, from an Israeli group on behalf of five of Israel’s banks, could have implications for all fiduciary investors.
The Israeli lobby group in NZ, Israel Institute, and NZ Super are in an escalating battle over investment exclusions relating to the banks which resulted in the fund selling its holdings, which it reported in March.
The Institute had tried to halt the divestment on the grounds that it was challenging the strategy in the courts and NZ Super should refrain from such action until that matter was resolved. The stocks were sold in February.
The Institute’s legal challenge follows an unsuccessful one against the fund in March this year in the NZ High Court over Western Sahara phosphate mining and distribution holdings that the plaintiffs sought to be excluded as investments.
In his ruling on that action, Justice Mark Woolford struck down the request to review the fund’s decision, giving weight to the fund’s ESG process. He said: “Engagement with a company with ESG issues may be more effective in changing a company’s practices for the better than withdrawal of investment in the company altogether (exclusion).”
The latest tactic by the Israel Institute involves the use of freedom of information law under NZ’s Official Information Act (OIA) for documents relating to the Israeli bank decision process. The banks in question are: – First International Bank of Israel, Israel Discount Bank, Bank Hapoalim, Bank Leumi and Bank Mizrahi-Tefahot. They have been involved in funding housing in the occupied Palestinian territories in breach of United Nations resolutions in the long-running and lopsided war.
In the second of two requests, the Institute sought further details on the NZ Super decision including investment committee papers, qualifications of individual authors of papers used to justify the stock sell-down – and specifically of Anne-Maree O’Connor, head of responsible investment – as well as any communications “about possible divestment from companies involved in “other occupations”.
In its reply, NZ Super said in a letter that most of the information – requested in almost 20 separate communications from the Israel Institute – had already been handed over.
“We also wish to record, for good order, that upon receiving this request we advised you that the nature and volume of your requests is becoming problematic,” the letter said.
“Aspects of the questions overlap, broadly framed and are complex to process. We note that you are lodging requests across other agencies for similar information, as we are also being consulted by these agencies in respect of requests they are handling.”
In a written response to questions from this masthead, the Institute’s Dr David Cumin said: “The Guardians do not seem to have discharged their required duty of care to administer ‘best practice’ policy as required by law.
“They appear biased because they have not used expert advice and seemed to rely only on information provided by BDS campaign proponents. The worst consequence of their perverse decision is political and entirely ultra vires of their remit…
“The Guardians divestment from Israeli banks masquerades as an ‘ethical decision’ but is likely to be discussed and interpreted in embassies in Australia and in America as a double-standard applied to Israel.
“This is curious, given the apparent wish of New Zealand to have a free trade agreement with the USA; and less dependence on China, Iran and other non-democratic human rights abusers. It is possible that some US states will implement their anti-boycott legislation against New Zealand, as they did with the Dutch fund made their mistake of divesting from Israeli banks.”
Dr Cumin, a lecturer at the University of Auckland who is active in the Institute, said there was still the possibility of legal action with NZ Super, although the case of the Israeli banks was different from that of the Western Sahara phosphate mines.
With respect to the OIA requests, he said: “We have tried to be as specific as possible in our requests as we have learned more about the omissions and errors in the justification document, who the NZSF was corresponding with, and who the authors of the document were. The volume of data we have received in each OIA suggests that whatever overlap there might have been is minimal.”
In the event of future litigation, from Israel Institute or other complainants about the fund’s investment policies, it is probably in a unique position compared with other sovereign wealth funds or government-owned fiduciary investment organisations.
One of the requirements placed on NZ Super by its Government is that it should not jeopardise the country’s reputation in the world, which could be seen as a little vague. Its mandate is:
“Under the Act, the Guardians must invest the Fund on a prudent, commercial basis and, in doing so, must manage and administer the Fund in a manner consistent with:
- best-practice portfolio management
- maximising return without undue risk to the Fund as a whole, and
- avoiding prejudice to New Zealand’s reputation as a responsible member of the world community.”
In his judgment over the Western Sahara phosphate miners, Justice Woolford cited evidence supplied by NZ Super’s Anne-Maree O’Connor. Woolford said, if taken to a logical extreme, ESG-based exclusions would leave “nothing left to invest in”.
In her evidence, O’Connor had said: “Very few businesses … cannot be linked in some way to undesirable ESG practice or impacts, often through supply or customer chains.”
Perhaps NZ Super is an exception among big investors in this region in attracting such vigorous questioning by interested parties. In Australia, the only attacks on super funds about their investments tend to come from politicians with agendas which are not as clear as Israel Institute’s.
It is understood that Australia’s Future Fund, for instance, which has a very similar set of ESG policies to that of NZ Super – having been set up by the same person, the late Paul Costello, who was the inaugural chief executive of both funds – has not had any pushback on its exclusions policy. Neither has the Accident Compensation Corporation of New Zealand (ACC), which has a fiduciary insurance fund almost as big as NZ Super’s NZ$60 billion (A$56 billion).
The Israeli Institute’s Dr Cumin said, however: “ACC is subject to OIA requests. Despite being lobbied by the same BDS campaign proponents, ACC have not excluded the Israeli banks from their portfolio. They have told us that “ACC maintains its own ethical investing policy…”
Coincidentally, NZ Super is in the process of reviewing its responsible investment strategy “to be sure it is fit for the challenges of the next 10 years and beyond”, the fund said in its regular ‘Guardians’ Stakeholders and Media Update’ published last week (see separate report this edition). Results of the review are expected later this year.
In the US some of the big pension funds and endowments have felt the wrath of their constituents. The two big Californian public funds, CalPERS and CalSTRS, have often endured picket lines and protestors outside their member meetings for a range of special interest groups.
And the Harvard foundation board in the past has been confronted by protest groups consisting of professors and students who were complaining about the bonuses paid to its investment team.
With Australian super funds, the requirement to hold annual member meetings has been in place for only a year and, so far, they have been quiet affairs. They could conceivably, however, be livened up by aggressive questioning in the future.
From a different point of view, believers in Roger Urwin’s notion of the “Universal Investor”, first written about in 2011, would be thinking more deeply of the broad responsibilities of big fiduciary funds.
Urwin, then head of investments at Willis Towers Watson and subsequently founder of the Thinking Ahead Group (and co-founder of the Thinking Ahead Institute), says some investors are so big they have a responsibility to the whole of society. This could see some of the world’s largest investment organisations with similar responsibilities to those of governments – a duty to act in the interests of all citizens.
