Every five years, New Zealand Treasury issues an independent review of New Zealand Super, in which it scrutinises the fund’s investment management, governance and organisational efficiency.
Willis Towers Watson (WTW) was chosen to conduct the review last year and delivered its verdict in July 2019. [i3] Insights caught up with Matt Whineray, Chief Executive Officer and former Chief Investment Officer of NZ Super, to ask him about the recommendations in the final report.
WTW didn’t find any major issues at the fund, but did ask a number of interesting questions.
One of those was whether the board of NZ Super was still comfortable with the level of active risk taken by its internal team under its strategic tilting program.
“In our experience, a large risk allocation to strategic tilting is unusual amongst asset owners as this tends to be a difficult area to consistently add value in,” the authors of the report noted.
We have a lot of discussion about tilting with the board because it is the biggest single user of active risk in the fund. But the reason it is is because we think it fits really well with our endowments and beliefs
Hence, they recommended asking the somewhat leading question: “Could the board confirm that it remains comfortable with the proportion of the active risk budget allocated to the strategic tilting program?”
Whineray says: “We have a lot of discussion about tilting with the board because it is the biggest single user of active risk in the fund. But the reason it is [the biggest user] is because we think it fits really well with our endowments and beliefs.
“What [WTW] said is that the board should confirm whether they are still comfortable with the portion of active risk allocated to tilting. And the board is comfortable.”
As a fund with a long-term horizon and a known liquidity profile, he feels it is the obligation of the team to make the best use of those attributes and he has no plans to reduce the risk budget for the tilting program.
“It is something that long-term investors should be doing to take advantage of those [investment beliefs]. We will maintain that program; it will remain a core part of our active strategies,” he says.
If past performance can be used as a measure of success, then the strategic tilting team, led by David Iverson, Head of Asset Allocation at NZ Super, passes with flying colours.
The tilting program has achieved a return of 1.1 per cent a year since its inception in April 2009 to 31 March 2019, where it was targeting a return of only 0.4 per cent.
But what about going forward?
Many market participants expect the investment climate to be less favourable, seeing lower returns and higher volatility. NZ Super has a high allocation to growth assets and this might result in some big swings in the years ahead.
I’ve been talking a lot about the volatility inherent in our portfolio. The risk is not the volatility itself, but the chance that we might lose the confidence of our sponsors
“Going forward will be different and that is something that we’ve been quite careful to be explicit about in the last 18 months,” Whineray says.
“When I took over from Adrian [Orr, the former CEO of NZ Super], I’ve been talking a lot about the volatility inherent in our portfolio. The risk is not the volatility itself, but the chance that we might lose the confidence of our sponsors.
“We know it is going to be a volatile return stream because we have deliberately chosen a reasonably risk-orientated portfolio based on our endowments: our long horizon, our liquidity profile, our operational independence and our sovereign status.
“Those four things are really important foundations for the investment approach that we’ve taken. But the big risk for us as investors is that we get stopped-out inside our investment horizon because we lose the confidence of our sponsor.
“That is why that education is really important and this is why it is useful to have something like this WTW report every five years, because it provides a way of doing that which doesn’t just go to your returns.
“Because in a world where you have good equity markets and you put a bit of risk on, you look like a genius. But if those two things aren’t the case, you don’t look like that.”
NZ Super is currently in the process of reviewing its reference portfolio, contemplating whether it makes sense to add assets to this benchmark portfolio or change the existing weightings.
Whineray says the review provides a good opportunity to go back and take another look at the fund’s investment beliefs too, since they were formulated almost a decade ago.
We said that we will review our investment beliefs in parallel with our reference portfolio review, because it just happens that this year is that year that we are doing that
“We said that we will review our investment beliefs in parallel with our reference portfolio review, because it just happens that this year  is that year that we are doing that. We are doing that reference portfolio review every five years,” he says.
“The reference portfolio review will be finished this financial year, so by the end of June 2020. We’ve got a number of check-ins with the board. We talked about the constituent asset classes and then the potential different portfolios that they might consider. So that will run for the next little while.”
Another recommendation by WTW was to consider the incorporation of factor-based strategies into the portfolio, something the current reference portfolio review could take into consideration.
But Whineray is hesitant to adopt risk premium strategies, largely because the fund already takes risk factors into account at the asset allocation level.
“We’ve had a few discussions with Willis Towers Watson about this. In fact, we’ve also asked them last year to take a look at our proxy program and this program is where we decide what we sell out of the reference portfolio to fund any non-reference portfolio assets,” he says.
“You can have quite simple proxy programs, and I would describe ours as a relatively simple one, or you can have much more complicated risk factor ones. Where we got to was: ‘Look, we understand that these programs can be useful, but they don’t give us a great deal of insight into the portfolio compared with our risk budgeting process.’
“That said, we think there is a little bit more scope for this in our scenario analysis, where we can think about macro factor analysis and think about how the portfolio performs under different scenarios. So the asset allocation team will keep developing that as part of our regular investment reporting.”