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.
WTW wins NZSuper review race (again)
The New Zealand Treasury confirmed WTW would run the upcoming five-yearly review of the now $70 billion NZ Superannuation Fund (NZS) in a release late last month. The global consulting giant completed the previous NZS investigation in 2019 in a role that has historically been shared around different providers.
Local actuarial firm EriksensGlobal was first to review the fund in 2004 followed by Mercer in 2009 and Promontory Financial Group in 2014. Treasury said in the statement that it “conducted a thorough evaluation process which considered a number of high-quality proposals” before handing WTW the NZS gig for the second time in a row.
Under the 2001 establishment terms, the fund must open up every five years to outside scrutiny to ensure it’s “effectively” meeting the goals laid down in the legislation. The statutory review typically covers the effectiveness of NZS “policies, standards and procedures” and fund performance, among other factors. WTW will also take a deep dive into the “operational and investment processes” during the 2024 effort.
“This will include an evaluation on how the Guardians are managing risk and liquidity; governance; optimising endowments; asset allocation techniques; internal vs external investment management, and ethical/sustainable investment frameworks,” the statement says.
In its 2019 report – authored by the firm’s then global head of governance consulting, Tim Mitchell – WTW found NZS in excellent health, concluding “so far so good”. but made five recommendations and 13 suggestions to lift the bar even higher in areas such as culture, remuneration and investment risk management.
“The Guardians and the Treasury should think deeply about the accelerating change in the industry and the “Red Queen race”, where increasing speed is needed to survive and thrive,” the WTW report said.
In Alice in Wonderland, the Red Queen and the book’s protagonist famously hold a running race where neither makes any ground. 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”.
Meanwhile, the NZS is yet to name a permanent successor to Matthew Whineray, who departed in December after five years in charge. Paula Steed, who joined the fund as general manager strategy and shared services, continues as acting chief executive.
