The Reference Portfolio is selected as the lowest-cost access to the most relevant, liquid, market exposure the Fund needs to meet its mandate, providing both economic return and a benchmark for active investment.
The Guardians expect the Reference Portfolio to return 7.7% over 20-year periods, 2.7% above the estimated risk free (Treasury Bill) interest rate.
A five-yearly review by the Guardians has found that the Reference Portfolio’s current mix of 80% equity ownership and 20% fixed income assets is appropriate, given the Fund’s 20 year-plus investment horizon. Equity ownership is often referred to as growth assets, because equity values grow in line with underlying economic growth over long periods.
Guardians Chair Gavin Walker said careful consideration had been given to the level of risk it was appropriate for the Fund to take. “Setting the Reference Portfolio is the most important decision we make as a Board. The Fund’s long timeframe and certain cash flow mean it can take on more equity exposure than many other investors. We are satisfied that the 80% growth, 20% fixed income ratio is appropriate. We are prepared to weather volatility in fund returns as asset prices fluctuate in the short-term – indeed, as the Fund experienced during the Global Financial Crisis – in order to maximise long-term performance.”
The Fund, which was established in 2001 to help pre-fund universal superannuation benefits, is not projected to start paying out money until 2031/32, and will continue to grow for many decades after that.
“Growth assets are volatile over short periods and not every individual investment will be successful,” said Chief Investment Officer Matt Whineray. “Over time and as a whole, however, growth assets deliver a higher return than a lower-risk, less volatile investment strategy, as they are intrinsically linked to economic growth.”
The Reference Portfolio’s existing 5% allocation to listed NZ equities also remains unchanged. Whineray noted that the Fund’s actual portfolio currently had around 7% invested in listed NZ equities and approximately a further 8% in other NZ assets.
Changes to the composition of the Reference Portfolio include increasing the allocation to global equities from 70% to 75%. Of this, 65% is targeted to developed markets and 10% to emerging markets. “This is a technical change - we believe emerging markets are under-represented in ‘all-world’ indices, and hence we are correcting for that,” said Whineray.
The Reference Portfolio’s 5% allocation to global listed real estate investment trusts has been dropped. Mr Whineray said the Guardians believed the Fund achieved sufficient exposure to listed real estate through its global equity exposure.
The Guardians will also continue to hedge the Reference Portfolio 100% to the New Zealand dollar, meaning it is not impacted by changes in the dollar’s value. “This provides a very clear performance benchmark for any active currency investments we make outside the Reference Portfolio,” Whineray said.
The Guardians introduced the Reference Portfolio approach to managing the Fund in 2009. Over its first five years, the Reference Portfolio returned 13.2% compared to an expected 8.5%. The risk (as measured by annual volatility) of the Reference Portfolio over this period was 8.4% compared to an expected 13.2%. The actual Fund generated an additional 3.65% p.a. ($4.55 billion) over the period through active investment decisions made by the Guardians.
Currently, around 70% of the Fund is invested in line with the Reference Portfolio. “We only make investments outside the Reference Portfolio when we are highly confident that they will improve the Fund’s performance versus the Reference Portfolio,” said Whineray.
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