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.
NZ Super plots costs, headcount growth, returns
The NZ Superannuation Fund (NZS) has forecast total costs to reach almost $240 million including performance fees over the 12 months to June 30, 2025, according to its just-published statement of performance expectations.
However, forward estimates of NZS expenses including asset- and performance-based external manager fees are notoriously difficult to land given the variables involved.
The previous statement of performance expectations, for instance, tipped total costs for the now-completed 2023/24 reporting year at almost $220 million, or an expense ratio of 0.31 per cent: actual costs came in at close to $262 million, or 0.37 per cent of average funds under management.
“Performance fees are only paid when investment managers outperform their benchmarks and so they are better described as an offset against returns than a cost,” the latest statement says.
Excluding performance fees, the NZS projects costs to reach almost $210 million, or 0.28 per cent, in the current financial year, of which the more reliably modelled internal costs should total about $107 million (equating to 0.14 per cent of assets under management).
NZS staff expenses totalled just under $70 million over the 12 months to June 30, 2024, with the figure set to rise if the fund meets hiring targets for this financial year.
“The Guardians’ forecast is based on the key assumption that the headcount for the Guardians will increase from the actual level of 229 as at the end of March 2024 to 246 employees by 30 June 2025,” the statement says.
NZS board of Guardians chair, John Williamson, notes in the accompanying ‘statement of intent’, which sets out five-year objectives, that the fund has outperformed expectations since inception in 2003.
“Net government contributions of approximately $16.5 billion during that time have been used to create an investment portfolio currently worth $74.1 billion,” Williamson says.
But the NZS has forecast future 20-year rolling returns to average 7.8 per cent, below the annualised 10 per cent result achieved in its first two decades.
“In estimating the NZ Super Fund performance, we currently expect our reference portfolio to outperform the risk-free rate of return (as measured by 90-day NZ Treasury Bills, a proxy for the Government’s cost of debt) by 2.8 per cent p.a., and the NZ Super Fund to outperform the reference portfolio by 1.0 per cent averaged over rolling 20-year periods,” Williamson says.
The long-term performance projection assumes a risk-free annual return of 4 per cent.
Now approaching $80 billion, Treasury forecasts the NZS to top $100 billion before the end of this decade and peak in the 2070s at possibly $1 trillion: the government is forecast to begin drawing down on the fund to help smooth universal pension payments in the 2035/36 financial year.
But with rapid growth ahead, new chief executive officer, Jo Townsend, is implementing the so-called “Guardians of the future” strategy to focus on the fund’s investment, operations, team culture and external presence as it scales up.
