NZ Super grows to $77b but fails to outperform market again

Monday, 9 September 2024

The New Zealand Superannuation Fund has grown by just over $11 billion over the past year thanks mainly to strong share-market returns and now has almost $77b in its coffers.

It experienced a 14.9% return over the year to the end of June, after achieving a 11.9% return the year prior.

However, it has failed to achieve its target of using its investment skills to outperform the market for the second year in a row, putting the size of staff bonuses in two years time in doubt.

The fund was established to help meet the escalating future cost of superannuation payments, with the first draw-downs from the fund expected to begin in the 2030s.

The fund passively invests about two-thirds of its assets in the likes of listed shares and bonds, meaning that the bulk of the fund rises and falls in line with global markets.

But it actively invests the remainder to attempt to put icing on the cake.

Chief executive Jo Townsend, who was appointed to head up the fund in April, said the fund as a whole had underperformed its passive reference portfolio by 0.2% in the year to the end of June and 0.16% the year prior.

That is as a result of its active investments slightly dragging down its average return.

Those returns take into the account the costs involved in running its active investment team.

The latest result marks the fourth time in 14 years that the Super fund has underperformed the reference portfolio and has the potential to put future staff bonuses at risk.

Between 20% and 40% of staff pay is tied to the fund outperforming its reference portfolio, but those incentives are based on their ability to do so over a rolling four-year period.

A bumper 7.25% return from active investments versus the reference portfolio in the Covid-affected year to June 2022 means this year’s bonus is safe, and should also make next year’s bonus safe.

But bonuses for the year ending June 2026 and June 2027 will now be much harder to achieve.

Townsend said NZ Super had still added a lot of value to its passive portfolio over the longer-term, despite this year’s performance.

“Since the fund was created in 2003, returns had outperformed the reference portfolio benchmark by 1.46% per year,” on average, Townsend said.

“To put it another way, the fund is more than $17b better-off than if we had implemented a strictly passive, index-linked approach.”

It was also the case that it was more likely to under-perform against its reference portfolio in years when returns from listed shares were strong, she said.

The Super Fund currently invests about $8b or just over 10% of its assets in New Zealand investments.

Townsend said that although she expected that would increase in dollar-terms, it was not necessarily the case that the fund would invest a higher proportion of its wealth locally.

“New Zealand is our home base and we should have an advantage investing here, but every opportunity that we look at we need to assess on a prudent commercial basis.”

There has been speculation the Government will invite the fund to put capital back into Kiwibank to boost competition in the banking sector.

Townsend said the fund would “engage with any party about any particular investment” and would look at Kiwibank in “exactly the same way we look at any other potential investment”.

She indicated it could in theory invest in Kiwibank even if there was no means mapped out for it to realise its investment through a public listing of the bank.

“There are no prohibitions as such in terms of the conditions under which we would invest and we would just look at all those aspects as part of our due diligence.”