An independent assurance review into New Zealand’s ACC has recommended the insurer to adopt a reference portfolio framework to manage its investments against.
Willis Towers Watson (WTW) has recommended Accident Compensation Corporation’s (ACC) investment arm to adopt a reference portfolio to measure its performance against in an effort to introduce further rigour to the investment process.
The investment consultant made the recommendation as part of a broader assurance review, the first of its kind for the NZ$ 51 billion fund.
ACC Investments currently uses a strategic asset allocation (SAA) and although WTW said this method was ‘appropriate’, it argued that a reference portfolio provided a more objective form of measurement.
“ACC’s methodology for measuring investment performance relative to an SAA benchmark is appropriate for measuring how successful ACC is in portfolio construction of the various asset classes in which it invests,” the authors of the review report wrote.
“[But] assessing performance versus an SAA benchmark only does not capture the whole
picture, given the subjectivity involved in selecting benchmark building blocks and given the fact there are active decisions in constructing the SAA,” they said.
WTW noted that ACC Investments did perform this research last year, but the consultant would like to see this occur on a regular basis.
“Periodic assessment of SAA benchmark performance versus a notional reference portfolio would add rigour (noting a one-off exercise was conducted on this in 2024),” they said.
The Reference Portfolio Framework
Typically, a reference portfolio is notional portfolio whose risk profile is based on an investors risk appetite and is codified by the board. Once set, it doesn’t change much over time.
For example, New Zealand Super introduced a reference portfolio in 2010 and set the risk profile as 80 per cent growth assets and 20 per cent defensive assets. Although the composition has been fine-tuned during its existence the risk profile remains the same.
Under an SAA, however, the risk profile can change as market conditions change. Typically, institutional investors review their SAA once a year and tend to make minor adjustments to set the portfolio up for the expected market conditions.
David Iverson, who took on the role of Chief Investment Officer in June this year, welcomed the review by WTW but defended the use of an SAA as a more dynamic form of measurement.
“Our SAA takes 20-year returns and depending on what’s happening with the equity risk premium versus bond returns, we adjust the SAA. So it’s slow-moving, but it’s dynamic. The reference portfolio is really a fixed allocation to bonds and equities,” he says in an interview with [i3] Insights.
“We have a belief set that markets are partly predictable, which is why we do it that way. There is nothing to suggest that markets aren’t continually predictable, and so we find that to be a better way of running money,” he says.
But Iverson also points out that while ACC Investments doesn’t have a formal reference portfolio and is unlikely to put one in place, the team does assess periodically how the portfolio would have done against a benchmark portfolio.
“We already have something like that floating in the background,” he said.
ACC Investments Gets Clean Bill of Health
The WTW review found that ACC Investments has an experienced investment team, which produces consistently good returns at low costs.
“ACC’s targeted Management Expense Ratio is 0.17 per cent p.a. for the total portfolio is highly competitive, particularly given the level of active management across the portfolio,” the authors said.
And although the return from active management has fallen since the early days, largely an effect of the fund becoming bigger and having more capacity constraints in the local market, it still outperforms its active return target of 15 basis points.
“Overall active returns have been strong since inception, with an average active return of 1.20 per cent p.a. (portfolio return of 9.29 per cent p.a. versus the SAA benchmark
return of 8.09 per cent. p.a.).
“Over the past decade, relative performance has been lower than in the past… Nevertheless, the portfolio has still outperformed by 0.26 per cent p.a., 0.64 per cent p.a. and 0.50 per cent p.a. (after transaction costs, gross of management costs) over the three-,
five- and 10-year periods, respectively, to 31 December 2024,” the authors wrote.
Iverson responded that he was pleased to see the fund had ticked the box of running an efficient and effective investment operation. He also found the review instructive in its suggestions for improvements, since he only took on the CIO role recently.
“[What] is adding value to us, are the suggestions and recommendations about how to improve. That is helpful because it means I don’t have to do all the heavy lifting,” he says.
“So from that perspective, very happy with it. The reviewer could see what we can see: a well-run operation with excellent people producing good results at low cost. So that’s comforting,” he said.
Addressing Adequate Resourcing
WTW did note that ACC Investments seemed somewhat light on resources. For example, the consultant argued the lack of a dual- or multi-portfolio manager approach can result in key person risk.
“Whilst there are named secondary PMs for each portfolio, it appears this is more for back-up/business continuity purposes and these individuals are not actively involved in the day-to-day management of the Portfolio,” the authors said.
WTW also pointed out that some of the resources available to the investment team were shared with the broader organisation and that this was likely to cause constraints in the areas of operations, investment accounting and data & systems, especially as workloads were expected to increase.
“We observed a number of key staff with multiple roles throughout our review. This isn’t atypical in a relatively small team, but we caution the danger of multiple roles in investment organisations, particularly to be able to address the combination of business-as-usual alongside more non-standard, strategic activity,” the authors said.
It also restrained their ability to engage in activities that would broaden their knowledge and provided continued development.
“Given the relatively narrow nature of the asset owner community in New Zealand, it is important that ACC Investments has exposure to global peers, by way of direct collaboration and knowledge sharing and by conference attendance and other learning and development initiatives amongst the team,” they said.
“This would provide enhanced employee value proposition, while enabling the team to understand investment best practice and evolve and refine investment processes for the ever-increasing macro challenges faced by ACC Investments.”
Iverson responded that staffing was a topic that featured high on his agenda.
“Historically, ACC has always been run with a very small group of people, which shows you why we’re low cost, and the returns we’re able to produce is very good. But resourcing is clearly something we’re looking at, given the complexity of the organsiation.
“We run five schemes with 66 people, and that includes front, middle, back office and administration. So, in their words, we may be resource-light. I’m going through that with the teams right now to confirm that’s the case,” he says.
WTW also pointed out that the relatively light resourcing of the organisation had implications for succession planning, which needed to be addressed to ensure the stability of ACC Investments.
“No individual lasts forever, and to have good succession practice in place is something that we are already mindful of,” Iverson said. “We already have a talent map, and we already have succession planning in place, so it’s really about just turning the handle on that,” he said.
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