Contrary to what its name suggests, NZ Super is not a pension fund but a SWF in its own right, and one that has performed consistently well since its inception in 2001. After a seven-year hiatus, the NZ Government resumed capital injections into the fund, which expects to exceed its current US$ 40 billion and peak in size at approx. 40% of the country’s nominal GDP in the 2070s. We had the privilege to talk to Mr. Stephen Gilmore, NZ Super‘s CIO since 2019, about the fund’s success factors and future plans.
[GSWF] NZ Super is a unique growth story, having turned US$ 8.2 billion of net contributions into an US$ 40 billion net worth today. What are your success factors?
[NZSF] Our five major success factors include (i) a genuine long-horizon as we do not expect to make any large contributions back to the Government until the 2050s; (ii) a fairly healthy risk appetite with a benchmark portfolio made up of 80 percent equities and 20 percent fixed income; (iii) a very strong governance structure; (iv) a portfolio that is fully currency-hedged; and (v) a very successful strategic tilting / dynamic asset allocation approach.
[GSWF] What has changed since 2018/19 transition, with Matt Whineray taking over as CEO and you as CIO?
[NZSF] There have not been dramatic changes (“evolution” rather than “revolution”). The Government restarted its contributions, so the fund will be larger. We have given considerable thought to which investment opportunities are scalable. That has included, among other things, a greater focus on real assets, where we have recently hired specialists in real estate and infrastructure. We are also improving our data analytics and risk management processes and have increased our focus on sustainable investing.
[GSWF] Your current allocation is 10% bonds / 71% stocks / 19% private markets – will this change in the next few years?
[NZSF] It is a difficult issue as we expect continued low interest rates and low prospective returns. In 2019, we looked at new opportunities including pitching alongside CDPQ to build and operate Auckland’s proposed Light Rail project. While our bid didn’t go through, it was a great learning experience, and we expect to focus on similar opportunities in the future. We will also enhance our engagement with external managers, increase our scale and identify key new partners to work with.
[GSWF] You recently co-invested with OTPP into New Zealand’s largest domestic pathology and lab testing business, and 14% of your portfolio is in NZ – what are your views of the local market? [NZSF] We have a comparative advantage in NZ and know the market well. We also pay heed to a Ministerial Direction we received from Government in 2008 to identify and consider investment in NZ. In the end however any investment has to meet our mandate and deliver positive risk adjusted returns.
[GSWF] You have direct stakes in three US-based start-ups. How have these worked out for you and are you bullish on VC?
[NZSF] An average investment in VC does not necessarily add value, yet there is potential for great opportunities in the industry. We manage everything from Auckland though, so it can be a challenge for remote holdings given time zones and travel difficulties.
[GSWF] NZSF’s 6-yr annualized return has been higher than any other SOI at 9.52%. How is your performance so strong?
[NZSF] Besides the five success factors I mentioned, it is key that we stick to the program. A good example was COVID, where we did not reduce risk, but instead increased it by leaning in to a falling and cheapening equity market. In 2018, we publicized what would happen if we went through a repeat of a shock like the GFC. So when we had the shock in 2020 our stakeholders were ready.
[GSWF] Your decision to reduce the carbon exposure in your reference portfolio has added an additional 0.6% p.a. since it was incepted in 2016. What is the rationale? [NZSF] We thought that our then carbon exposure meant that we were taking undue risk that was not being rewarded, so we reduced our exposure, and this happened to increase our returns. We are perceived as leaders in responsible investing, but the bar keeps rising so we’ve embarked on an effort to maintain our social license / best practice.
[GSWF] All of NZSF’s 155 staff work out of Auckland – are you considering opening any office overseas in the future?
[NZSF] We have a competitive advantage in NZ, but what edge would we have elsewhere? And then there is the issue of culture. Sometimes the distance provided by being based somewhere like Auckland allows for better perspective. It can be different in a place like London where it might be more difficult to isolate the signal from the noise. It is unlikely we will open any other office in the near future, although the team continues to expand and we’re undertaking a global search for roles such as Head of Asset Allocation.
[GSWF] You spent almost nine years driving Future Fund’s investment strategy – how do you compare both funds?
[NZSF] There are some similarities including the naming “Guardians” and the founding CEO (Paul Costello), but also a lot of differences. One of the major differences is history: NZ Super was set up first, was small and had an inflow of capital, whereas Future Fund had a lump sum to start with and no subsequent contributions. That and the fact Future Fund has a shorter time horizon, as drawdowns may happen earlier than in NZ Super, led it to adopt a more conservative risk profile. Also, the governance arrangements are slightly different, and we are more systematic around dynamic asset allocation. But the relationship is very close. For instance, Sue Brake (Future Fund’s CIO) worked for 7.5 years for NZ Super. We are eager to explore further partnerships and club deals with them and other SOIs around the world.