Investment excellence is something the world has come to expect from New Zealand. It has become almost as much part of the country's DNA as excellence in rugby union. Forgetting Saturday's test match loss to the British and Irish Lions for a moment.
Adrian Orr, chief executive of NZ Superannuation Fund, often described as a New Zealand sovereign wealth fund, addressed the subject at the State Streets Global Markets research retreat on 11 May this year.
The fund is a buffer fund, saving today for a cost that will come a long way into the future. The first withdrawals are not expected until the early 2030s and the Fund will continue to increase until the 2080s.
A brief history
The Guardians of NZ Superannuation is a double arms-length crown entity that was set up to manage the fund. In Maori, the concept it represents is kaitiaki, which means caring, looking after something precious for the future.
The Guardians is required to invest the fund in a manner consistent with
- Best practice portfolio management
- Maximising return without undue risk to the fund as a whole
- Avoiding prejudice to New Zealand’s reputation as a responsible member of the world community
Investment secrets of The Guardians
The Guardians has just published a 'How we Invest' paper on its website. It says it uses a number of active investment strategies to add value to the fund. Of these, the most significant is the strategic tilting programme, says Matt Whineray, chief investment officer.
He says that tilting has added substantial value to the fund since it began in 2009. The new paper aims to explain how tilting works and also explain the performance of the strategy to date.
The essence of tilting
Strategic tilting is a value-adding strategy which alters the fund’s exposures to certain asset classes, including equities, bonds, credit and currencies. This strategy is designed to capitalise on certain investment advantages that the fund has.
These are a long-term investment horizon, a certain liquidity profile and a belief in mean reversion of asset prices and risk premiums. Strategic tilting increases exposure to cheap assets; it cuts exposure to expensive assets.
This is sometimes called dynamic or tactical asset allocation, it notes.
Three key elements for operating a successful strategic tilting programme
- a supportive investment philosophy that links to the fund’s advantages as an investor
- a disciplined risk allocation approach
- strong governance and alignment of interests
The tilting programme incorporates a number of investment philosophies in its design. The investment philosophy relies on (i) mean reversion and (ii) long horizon. It does not rely on momentum trading or short-term forecasting.
Mean reversion is a belief that asset prices tend toward their values over time. This belief makes no claim about the specific path prices may follow, nor how long it will take. The programme does not rely on an ability to forecast short-term price movements.
Long horizon leverages the fund’s long horizon endowment, stable risk aversion and operational independence. The fund can weather short-term volatility and can look through short-term changes in market risk aversion.