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 Govt Super in management-board rift
An independent review has called for a governance and investment upgrade at the NZ Government Superannuation Fund after finding the fund’s management and board had been at odds over recent performance.
In its five-year statutory review, the Australian arm of global consultancy Willis Towers Watson (WTW) found the GSF, a NZ$4.2 billion (A$4.0 billion) fund which predates the much bigger NZ Super, had been in disagreement since last year following the fund’s recent run of poor performance.
According to the WTW analysis delivered to Treasury in May, the GSF “sharp underperformance” compared to its reference portfolio during the 2019-2020 calendar years “has led, inevitably, to some loss of conviction in the investment thesis and questioning of the investment strategy”.
The WTW report says: “There is some divergence between the Board and executive as to how things are going. Our impression is that the Board [Government Superannuation Fund Authority (GSFA)] would like to see more work on why the Fund portfolio is configured the way it is, including asset classes not currently in the portfolio, whilst the executive regard the portfolio as relatively settled.”
The GSF portfolio is managed by the Wellington-based Annuitas, headed by Simon Tyler. Annuitas also manages over NZ$2.2 billion for the National Provident Fund, which oversees nine government-related superannuation schemes.
Despite recording positive returns over 2019 and 2020, the GSF underperformed its reference portfolio – a notional mix of indexed asset classes – by 7 and 5.2 per cent in each of the respective calendar years. (For the first quarter of 2021, though, the GSF returned 7 per cent, about double the reference portfolio performance for the same period.)
However, the WTW review says that while the fund underperformed over the two-year period “this does not imply that GSFA made poor investment decisions, only that in the particular set of circumstances that have driven asset class performance (particularly in 2019 and 2020) a different mix of assets would have produced better outcomes”.
“The more important question is whether the investment choices GSFA made for the Fund were reasonable in the context of circumstances at the time,” the report says. “… we are satisfied, with minor qualifications, this was the case.”
The GSF board, chaired by Anne Blackburn, commissioned a separate investment review last year that WTW used in its analysis.
“Strong investment beliefs, with a high degree of alignment between the Board and the executive, are a cornerstone of good fund governance. This has been recognised by GSFA, particularly following recommendations in the Board’s recently commissioned independent review,” the WTW report says. “We caution that there is much work to be done here, perhaps more than is currently appreciated.”
For example, the statutory review says given the “varying degrees of previous investment experience” of GSF directors “there is a need for ongoing education of Board members on relevant investment topics”.
“Existing Board education is somewhat ad hoc and might not cover all topics required for individuals to able to effectively oversee investment decision making,” the WTW report says.
The GSF, which upped its risk exposure over the last few years, invests via 25 external managers including alternative asset classes such as ‘style premia’ – a factor-based portfolio run by AQR Capital Management – as well as life settlements and insurance-linked funds.
WTW says while the GSF (and Annuitas) “has many strengths and positive attributes”, the relatively complex investment strategy requires an overhaul of the “governance budget” with three options on the table, namely:
- bolstering resources across both the board and the, currently five-strong, investment team;
- using more third-party providers – for example, adding an independent non-board member to the GSF investment committee; or;
- simplifying the fund’s investment strategy.
Overall, WTW has nine ‘recommendations’ to improve the GSF, spanning investment, governance, risk management and other internal processes.
The consultant also offers ‘suggestions’ to lift the quality of GSF process documentation, investment model and environmental, social and governance (ESG) approach.
– Investment News NZ
