New Zealand Superannuation Fund, the country’s NZ$44 billion ($28 billion) sovereign wealth fund, said on Tuesday it anticipates lower returns – “possibly lower than its long-term average” – over the next few years in view of the current market environment.
The wealth fund, better known as NZ Super, returned a little over 7 per cent in the fiscal year ending June 2019 after costs and before local tax, according to its 2018-19 annual report released this week.
During the year, growth assets in the fund’s portfolio saw negative returns in the first half. In fact, fund performance declined to a low point on Christmas day of 2018, before rebounding strongly to the year-end figure, said NZ Super CEO Matt Whineray.
The annual performance boosted NZ Super’s return since its inception in 2003 to 10.15 per cent per annum, NZ $8.3 billion more than its reference portfolio benchmark, a passive, low-cost notional portfolio of listed equities and bonds that serves as a benchmark for its investments.
NZ Fund’s performance vs. the Reference Portfolio.
Unclear future outlook
“The forward outlook is unclear. Projections for economic growth are being revised down slightly, and inflation remains tepid, which is consistent with the view of bond markets, but monetary conditions are supportive and equity markets rumble on… We expect lower asset returns going forward, which is consistent with this stage in the cycle,” NZ Super economist Mike Frith wrote in the annual report.
Earlier this week, Australia’s A$165.7 billion sovereign wealth fund Future Fund had warned of a subdued long-term investment outlook after reporting a 3.4 per cent drop in its return for the three months to September 2019.
Private equity exposure
NZ Super, which has backed private equity (PE) funds managed by firms such as Bain Capital, HarbourVest and KKR, had a 5 per cent exposure to private equity as at 30 June 2019.
NZ Super revealed outstanding commitments to PE and collective investment funds totalling nearly NZ$216.2 million at the end of June. It had additional commitments of more than NZ$500 million to provide follow-on capital, according to its annual report.
During the year, the wealth fund dissolved its international team for direct investments, choosing to “focus instead on leveraging [its] external managers’ relationships” to secure investment opportunities such as through co-investments. The fund retains a direct investment team focused on the domestic market.
In terms of geographies, more than 85 per cent of the fund is invested offshore. Its exposure to the Asia Pacific was 31.4 per cent as at 30 June 2019.
Venture capital mandate
Earlier this year, NZ Super received a mandate from the government to establish an NZ$300 million venture capital vehicle. The superannuation fund has appointed New Zealand Venture Investment Fund (NZVIF) to manage the new fund-of-funds.
The wealth fund said it has spent the last year working on the legislation, investment structure and mandate parameters of the new VC fund along with representatives from Treasury, the Ministry of
Business, Innovation and Employment and NZVIF.