Carbon exclusions boost NZ Super returns

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Implementing carbon-lite policies has added about 0.3 per cent per annum to the NZ$43 billion (A$42 billion) NZ Superannuation Fund (NZS) performance, according to chief executive, Matthew Whineray.

Whineray told the recent Finance and Expenditure Select Committee during the annual NZS review that the “portfolio is 30bps per year better off, which is, we’ll call it, a few hundred million dollars because of the removal of those companies from our portfolio”.

He said: “We don’t make a lot of noise about that, because it is a short period of time, but there’s no doubt that it has improved the performance of the portfolio to date.” NZS shifted its passive global equities holdings, which represent about 60 per cent of total fund assets, to low-carbon settings in 2017. The move saw NZS divest about $700 million from underlying stocks with high carbon reserves or ‘emissions intensity’.

“We’ve got a very long horizon,” Whineray told the select committee. “We care about what these things are worth over the long term. We generally think markets are pretty good at pricing information. We don’t think they’re particularly good in the climate space.”

Despite excluding a number of stocks – including local firms Genesis Energy and NZ Oil & Gas – the NZS still owns plenty of fossil fuel companies such as UK giant BP and the Russian Gazprom, according to its most recent list of holdings. The March 4 hearing also followed shortly after the first serious bout of coronavirus-sparked global share market volatility, which Whineray said had created buying opportunities for the NZS.

“… over the course of the last week, we’ve been adding equities as equities have fallen, because that’s what we do with our tilting strategy, which has been a very successful contrarian investment strategy over time. We don’t change our big settings in terms of our big risk decision.

“… this type of volatility is one that then translates for us, as a result of the growth orientation of our portfolio, into volatility for fund returns. It’s something that we expect, because we’ve deliberately chosen that portfolio construction, but it’s something that we can also weather because of our long horizon and our certainty of—or knowledge of—what our liquidity profile looks like.”

He said the NZS was monitoring the “second-order” effect of volatility as it flowed through to credit markets and central bank responses. History provided a few clues about how the current crisis might play out, Whineray said.

“So you’ve got SARS, avian flu, H1N1, MERS, Zika virus. You look at those and they’re sort of informative, but they’re not really predictive,” he said. “So they can tell you sort of orders of magnitude of what markets went through and how long that took, but this one we have to wait and see how that evolves.”

Since February the NZS portfolio has shed more than $10 billion, falling from just under $49 billion to its current estimated level of about $37.8 billion.

The similarly sized Accident Compensation Commission fund was reportedly down about $3 billion over the same period. However, the ACC has a much lower exposure to global equities with about two-thirds invested in fixed income instruments, including a large allocation to NZ government bonds (equating to roughly 11 per cent of the total market).

During the March 4 hearings, NZS was also grilled over its direct investments, NZ exposure and the just-launched Elevate venture capital fund-of-funds.

Labour MP, Kiritapu Allan, asked Whineray if he thought “this group of politicians knows more than you about what you should be investing in?”. Whineray replied: “I couldn’t possibly choose to answer that.”

– David Chaplin, Investment News NZ

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