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 doubles down in local private markets
Shortly after David Neal was appointed as the inaugural CIO of the Future Fund, the guardians approved the appointment of global custodian Northern Trust as its asset servicing partner. No big deal, you’d think. Well, welcome to the world of high-profile public sector investing.
After the announcement, in May 2007, Sydney’s ‘Daily Telegraph’ tabloid led the newspaper with the story under the heading: ‘Our future in their hands’. In the more-polite world of the finance media, it goes down as arguably the biggest, or best, beat up of all time.
Neal had seen the headline as he arrived from his ferry trip into the city from Manly, where he lived at the time, and wondered what the story was about. After a quick read, he later recalled thinking: “What are they going to say when we start appointing the managers?”
Like it or not, public sector funds get a lot of attention from politicians, trade unions – which railed against the Northern Trust appointment – and various special interest groups. The Future Fund management and guardians can take heart that they don’t have to publicly report on a monthly basis, as their New Zealand counterpart, NZ Super, does.
In fact, one of the many similarities between the Future Fund, formed in 2006, and NZ Super, formed in 2001, is that the inaugural chief executive of both funds was the late Paul Costello. He had also presided over Northern Trust’s appointment in New Zealand. The company is still the asset servicing provider for both funds, so it must be doing something right.
The point to this footnote to the history of big fiduciary funds, especially sovereign wealth funds which often have their own acts of parliament, is that they also often have politically drawn requirements and constraints on where and how they can invest. For the Future Fund, for instance, the fund can invest anywhere it wants within its target risk parameters. However, it is not allowed to insource the day-to-day management of that money; it has to appoint external managers for all its investments.
NZ Super’s main specific directive, apart from the annoyance of having monthly performance reports made public and therefore scrutinised by all and sundry looking to gain a cheap headline, is that the fund is required to invest some of its assets in New Zealand, by “considering opportunities to increase the allocation to New Zealand assets”.
This requirement was introduced in 2009, although the fund had been investing directly in New Zealand companies back to 2005. No set level of investment is indicated but following a review, the fund saw additional NZ opportunities outside the listed markets.
Last week (February 3), NZ Super announced it had committed up to NZ$100 million (A$94.4 million) to another local private markets fund, which would take its total NZ assets to about NZ$7 billion, out of the whole fund’s assets of NZ$53 billion.
The fund will be a cornerstone investor in the fourth fund managed by Auckland-based Pioneer Capital, which is expected to close the latest fund with six-eight investors and NZ$260-280 million. NZ Super had already invested in the manager’s second and third funds. It targets NZ companies seeking international growth.
Del Hart, NZ Super’s head of external investments and partnerships, said high growth, mid-market companies were an important part of the fund’s diversified investment approach, which aimed to maximise returns without undue risk to the overall fund.
“We look forward to seeing this money put to work by innovative New Zealand businesses with the ambition and capability to succeed offshore,” he said.
Domestically, NZ Super has been investing in this sector since 2005, with previous investments generally delivering strong net returns above its passive ‘reference portfolio’ benchmark.
