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.
Big NZ fund’s global equities blues under review
The NZ$4.2 billion (A$3.9 billion) New Zealand Government Superannuation Fund has replaced two of its global equities mandates with two Australian-domiciled global equity products, ahead of an independent review of its strategy.
According to its 2020 annual report, post balance date, the Government fund (GFS) terminated Marathon and PanAgora contracts and appointed two Australian-based global share funds managed by T. Rowe Price and Hyperion Asset Management. In September, GSF also terminated ANZ as a currency hedge manager, leaving State Street as the sole provider of this service.
The report reveals that GSF has launched an independent review of its investment strategy after a poor two-year run has seen the scheme slip behind reference portfolio targets over all periods. The offshore equities-heavy fund was down -1.7 per cent for the 12 months to June against the passive reference portfolio return of 4.5 per cent and 5.7 per cent for NZ government bonds.
“Whilst the under-performance for the last two years has reduced the Fund’s average investment return over the last 10 years back to 8.6 per cent a year, net of fees, 1.0 per cent behind the ‘reference portfolio’, it remains ahead of that from NZ Government bonds by 3.2 per cent,” the report says. Since inception around 2001, the GSF portfolio – managed by Annuitas – returned 6.7 per cent – or 0.5 per cent under the reference portfolio. Annuitas is a joint-venture management and secretarial service company owned by the GFS Authority and the National provident Fund.
“The board believes its investment strategy remains appropriate. Nevertheless, given recent performance of the fund and in the light of heightened economic uncertainty and recent market turbulence, the board has commissioned an independent review of its investment strategy,” the report says. “This review will also provide information for the Government’s five-yearly statutory review of the fund in 2021.”
The GSF performance was hit by poor returns from global shares (compared to bonds) as well as its actively managed strategies lagging “returns from equity market indices almost entirely due to increasing prices paid for technology stocks”.
“While these exposures have hurt relative performance, the Authority has maintained the positions in the expectation that investors’ expectations of future growth in these large cap internet-based stocks will normalise at some point,” the report says.
The effect was amplified over the last two years as the GSF increased its reference (and actual) portfolio exposure to global equities, raising the target allocation 10 per cent to reach 70 per cent while dialing down offshore bonds by the same quantum to 20 per cent.
“This shift increased the Fund’s expected return and risk, so the reference portfolio is now expected to outperform New Zealand Government bonds by 4 per cent a year over the next 10 years,” the report says.
The GSF board, chaired by Anne Blackburn, saw two exits during the financial year – Michelle van Gaalen and Shelley Cave – replaced by Michael Sang and Financial Markets Authority director for capital markets, Sarah Vrede. Previously head of the NZ Debt Management Office, Vrede also serves on the GSF investment committee with chair Murray Brown and Alison O’Connell.
The GSF, created to help fill the fiscal hole by historical public servant defined benefit pensions, recorded a pre-tax after-costs deficit of over $82 million in the 12 months to June against a forecast surplus of $275.5 million.
– David Chaplin, Investment News NZ
