Government Super Fund To Reduce Bond Portfolio

Deutsche Bank's chief economist Ulf Schoefisch examines what the Government's changes to the GSF fund mean.

Tuesday, April 11th 2000, 12:00AM

Finance Minister Michael Cullen has announced changes to the management of the Government Superannuation Fund (GSF). The fund covers public sector pension liabilities and currently employs its own portfolio managers.

Current asset allocation
Current assets of the fund are valued at $3.4 billion, invested exclusively in cash and domestic fixed interest securities.

We estimate that government bond holdings correspond to about 16-17 per cent of total stock in the New Zealand market.

Proposed changes
Diversified investment strategy
In order to increase investment returns and to reduce the annual contribution the Crown has to pay the fund in the form of deferred employer contributions, the fund will be allowed to diversify its investment portfolio. Dr Cullen specifically noted that the fund would be able to invest assets in domestic and overseas equities, but we assume that investments will also include international bonds.

In terms of the influence on market conditions, Dr Cullen noted that `..." the fund will be diversified gradually so that the change can be absorbed by the financial markets with minimum disruption to Government stock rates, derivatives and interest rates more generally."

Governance arrangements
In order to achieve a clear separation between the management of the fund and the Minister of Finance, the Government will establish a GSF Board, which will oversee the fund's investment activity and "ensure the assets are invested on a sound commercial basis".

The board will appoint private fund managers and custodians, who will conduct the actual investment under the board's instruction.

Timing and market implications
Dr Cullen stated that the legislation required to implement the changes would be introduced "within the next few months". Given the normal legislative process and the time required to establish an investment board, we estimate that the implementation of the changeover to private fund mangers will not commence until Q4/2000 at the earliest.

Applying average ratios of diversification between domestic and offshore assets and between bonds and equities, we estimate that the fund would reduce its holdings of domestic fixed interest securities by around $1.2-1.5 billion - either through sale or the non- reinvestment of maturities. We expect that process to commence in early 2001 and, due to the intended gradual implementation, take up to 6 months.

With the necessary legislation not yet in place, the GSF has limited means to prepare for the portfolio changes within its near-term investment strategy. However, we may see a gradual move towards a shorter duration of the current portfolio. However, with no pressure to implement this change over a certain period of time, the market impact is likely to be minimal.

To read Micheal Cullen's press release on the changes CLICK HERE

Ulf Schoefisch is Deutsche Bank New Zealand's chief economist.

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