At a time when surplus capital, or dry powder in private equity parlance, is chasing financial asset returns globally and pushing up asset prices, New Zealand Superannuation Fund (NZ Super), which remains “strongly weighted” towards growth assets, believes that many assets are still fairly valued.
The fund, which has posted a return of over 10 per cent since its inception, said in its ‘Investment Environment Report’ released last week: “This glut in global liquidity has reduced interest rates, suppressed market volatility and pushed up the prices of financial assets. As a result, investors have observed actual returns well above our expectations across most asset classes.”
Prepared by Mike Frith, Manager, Economics at the fund, the report tries to explain the global investment climate and its implications for the NZ Super Fund.
The report’s view is in line with what NZ Super CEO Adrian Orr had said at the World Bank and IMF annual meetings in October. Orr had noted at the time that there was strong investor appetite for sound long-term infrastructure investments, including climate-related initiatives.
He had said that there was no shortage in the supply of capital and likewise, there was demand for long-term capital for relevant development and climate-change projects globally. “The challenge is in matching the supply of, and demand for, long-term capital,” he had then pointed out.
Meanwhile, the report in its projections for 2018 noted that global growth is broad-based and appears robust across US, European, Japanese and emerging market economies, with forecasters expecting this momentum to be sustained. However, the behaviour of central banks and US fiscal policy changes will have the biggest impacts through 2018.
With a closing fund balance of $37.38 billion at the end of November, NZ Super has the largest chunk of its investments in global equities at 66 per cent, followed by fixed income assets at 11 per cent, according to its performance report for November this year. Private Equity and Timber as asset classes have an exposure of 5 per cent each.
Among regions, investments by value at the end of November was 13 per cent for Asia — Japan at 7 per cent and Asia (ex-Japan) at 6 per cent. The largest portion by geography in terms of investment value is allocated to North America (47 per cent), followed by Europe (19 per cent).
Consistent with movements in asset markets, the fund returned more than 20 per cent over the past 12 months and the reference portfolio, which comprises around two thirds of the total fund and provides its benchmark, returned 19 per cent. The activities of the investment professionals within the fund delivered an additional 3 per cent or more than a billion dollars.
“The Fund remains busy – over the past six months it has made new investments in an Australian farming business and a conditional offer to invest in Fidelity Life, and made changes to our global equity portfolio to reduce our exposure to carbon emissions,” it said.
NZ Super made its first offshore farm investment in October and took a stake in leading Australian beef stud Palgrove, bringing its rural land portfolio to 33 farms worth approximately $340 million. During the same month, it also said it was acquiring a 41.1 per cent cornerstone stake in life insurer Fidelity Life by investing a minimum $68.5 million (NZ$100 million) in the company.