Sovereign wealth fund New Zealand Superannuation Fund (NZ Super Fund) could lose as much as $20.3 billion out of its coffers in the event of a repeat of the global financial crisis, according to its latest annual report.
NZ Super Fund returned 12.43 per cent to end the 2017-18 financial year at $39 billion, adding $4 billion to its war chest.
Based on its simulation, the fund expects the notional Reference Portfolio benchmark to fall by 44.7 per cent, meaning the fund will lose more money, at a 52.6 per cent clip, than the benchmark.
“The reason we estimate that the fund would lose more money than the Reference Portfolio benchmark is largely because we expect our strategic tilting programme would buy more growth assets as they fall in value,” Matt Whineray, chief executive of the New Zealand Superannuation Fund, said.
The same simulation, however, also showed how, in a repeat of the global financial crisis, the fund would recover its initial value, and catch-up lost ground, within 20 months, but only if it is able to “hold the course” with its investment strategies through a market cycle.
“So, the major risk to the fund is not that it will experience significant volatility in its returns – we know that will happen. The major risk to the fund is that we lose our nerve, close down our investment positions and lock in the losses experienced in the crisis. This would significantly impair the ability of the Fund to fulfill its long-term purpose,” Whineray added.
This year’s result brings the fund’s returns since its inception in 2003 to 10.4 per cent per annum, and value-added versus the Reference Portfolio to 1.49 per cent – a total of $7.6 billion.
The fund returned 12.43 per cent, after costs before NZ tax, beating its passive Reference Portfolio market benchmark by 2.02 per cent or about $700 million. It also exceeded the average return on Treasury Bills, its other benchmark, by 10.71 per cent or about $3.7 billion.
For the current fiscal year, Whineray said the fund will focus on innovation and disruption, long-term target state, and cloud IT.
The fund sees a challenging external environment due to decelerating growth, rising inflation, and the tightening of financial conditions, he added.