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.
NZS stays nimble, keeps things simple for ‘ever-changing investment landscape’
New Zealand’s sovereign wealth fund returned 16.85 per cent over the 12 months to 31 May, according to its most recent stakeholder update, putting it “well ahead of its benchmark” and contributing to a rolling 20-year return of 10 per cent per annum (after costs, and before NZ tax).
But while New Zealand Super (NZS) continues to perform excellently – and has been hailed by Global SWF as a leader in governance, resilience and sustainability several years running – new chief executive Jo Townsend used the update to warn that it faces “a number of challenges”.
“Top of mind is how we will scale and optimise the organisation given the projected doubling in fund size over the next 10-12 years,” Townsend said. “We want to do this without losing the culture and organisational character that has made us both successful and a place where very good people want to be. I’m conscious that the world is full of uncertainties and that the investment landscape is ever-changing. As the world gets more and more complicated, an ability to keep things simple, and remain nimble, will stand us in good stead.”
Part of that will likely involve the conclusions of the five-year review of its activities recently conducted by WTW, soon to be released by the Minister of Finance. The previous review, in 2019, found that NZS was “achieving best practice in its activities” and more capable of achieving high performance than “the vast majority of its peers”.
And on a numbers basis it’s clear that NZS has been a winning investment, with Townsend noting that active management had $16.9 billion in value and that the fund had generated $48.5 billion over Treasury bills, meaning “the government’s accounts are significantly better off as a result of investing in the fund instead of repaying debt”.
There’s also been a flurry of activity across NZS’ portfolio as it offloaded its 19.8 per cent stake in toll road operator Connect East Group to the Future Fund and QIC, increased its capital commitment to pan-European renewable energy developer, owner and operator Galileo, and restructured its 42 per cent interest in Kaingaroa Timberlands Partnership. It’s also handed out mandates to the likes of trend following outfit Florin Court and committed US$150 million to Domain Timber Advisors.
Meanwhile, NZS is still looking for a new chief investment officer following Stephen Gilmore’s departure for CalPERS earlier this year, with Alex Bacchus, head of its highly successful strategic tilting program, currently in the acting role.
