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.
New Zealand Super gets top marks from WTW, but review warns on complexity
The Guardians of New Zealand Superannuation – manager of the $75 billion NZ Superannuation Fund (NZS) – is operating at the leading edge of global best practice, with an “exceptional investment process” that stands out among global peers according to the latest five-year review of the sovereign wealth fund.
Under the review, carried out by WTW, the Guardians achieved “excellent” ratings across its business, governance, people and investment models, and a “very good” rating for its systems model – putting the fund “into a small group of leading asset owners globally”.
“The policies and practices praised by WTW are the product of a focus on continuous improvement that dates back to the Guardians’ very early days,” said Guardians chair John Williamson.
Improvements included a more conservative approach to liquidity management, changes to the risk budgeting process and a shift from responsible investment to sustainable finance practices. But the WTW review recommends that the Guardians mature the insourcing of private market investments and consider establishing an overseas presence – London, for example – in order to improve access to talent, GP and peer relationships and deals.
In its response, the Guardians said that it would look for ways to enhance how it resourced insourced investment in private markets, but said that while it would keep a potential overseas office “under consideration”, it had no immediate plans to establish an overseas presence.
WTW also suggested that the Guardians develop greater integration of systemic risk into the design of its total portfolio approach (TPA) through the use of “horizon scanning, (and) models that include left-tail risk measurement and management” as well as making sure that the reference portfolio is joined up with the fund’s investment approach.
And while the Guardians has a “strong edge” in organisational culture, it got pinged for how it was handling organisational complexity – a bugbear for big asset owners generally, but one that’s also a hallmark of TPA – with WTW recommending that it “develop a set of complexity principles and strategies” and address certain organisational imbalances that have developed from increasing complexity”. WTW said that the Guardians should also review its success planning practices to respond to “continuity challenges” – referencing the recent departure of CEO Matt Whineray and CIO Stephen Gilmore.
“While it is of course very satisfying to have the Guardians rated so highly by an independent reviewer, the report’s value to us lies in the recommendations and suggestions for how we can best meet the challenges ahead,” said NZS CEO Jo Townsend.
“How best to consider impact when we assess potential investments, how to maintain our culture as the organisation scales up, and mitigating the many systemic risks facing all investors are just some of the issues we will need to manage if we are to maintain and improve upon our record to date… WTW’s guidance will be very much front of mind as we consider how best to scale up and invest the Fund in years ahead.”
In its previous review, WTW recommended that NZS review its compensation framework, use a risk factor framework to help identify diversification opportunities, and allocate more resources to responsible investment issues, while suggesting the NZS board get more external advice on issues that are “highly complex or contentious”.
New Zealand Treasury projects that within 20 years NZS will be worth more than $200 billion, and paying out $1 billion a year to help fund New Zealand Superannuation, along with circa $4 billion in tax annually, while continuing to grow in size. Payments from the fund are set to commence in 2033.
