GSF - Storm in a tea cup?
Debate over the Government Superannuation Fund's $315 million loss in the three months to June has seen ill-informed debate from many quarters.
Wednesday, October 2nd 2002, 10:21AM
by Tim Anderson
Debate over the Government Superannuation Fund's $315 million loss in the three months to June has been ill-informed debate from many quarters, including the Green Party, who accuse the government of gambling with the life savings of public servants on overseas sharemarkets.
In a sense Rod Donald, the Finance spokesperson for the Greens is correct. Investing may seem to those outside the industry to be just that - a gamble. Fortunately for the government, and public servants, this is one gamble (to keep the metaphor going) that is destined to pay off.
While $315 million is a considerable amount of money to lose, the reality is that a loss isn't a loss unless you 'crystalise' or realise that loss. Seemingly backed into a corner, comments by acting Finance Minister Trevor Mallard stated that "…rebalancing will occur as a result of this." He adds "Clearly the New Zealand stock market is more attractive now relative to others compared to what it used to be."
Unfortunately Mallard is employing the 'knee-jerk' reaction typical of many first time investors. You invest, you lose, you pull out, thus realising your losses. In fact many would argue that in fact Mallard has it around the wrong way, New Zealand equities may in fact be coming off and international equities on the up.
That however is a short-term focus in what needs to be a long term investment decision.
What is critical in this circumstance is to understand the essence of effective investing that obviously some finance spokesman seem to need to learn. The long term benefits of diversification.
Diversification is essentially spreading your assets, or investments, across a wide range of risk categories in order to achieve the best risk adjusted returns. In technical terms, diversification is used to determine an 'efficient frontier' of risk adjusted returns.
Diversification acknowledges the fact that in some years particular asset classes will outperform other asset classes. Looking at the below graphic it can be seen that the best performing asset class changes almost on a yearly basis. It is no coincidence however that five of the last 10 years global shares have been the best performer.
|
Diversification Across The Asset Classes |
||||||||||
|
1993 |
1994 |
1996 |
1997 |
1998 |
1999 |
2000 |
2001 |
2002 |
||
|
NZ Shares |
17.87% |
25.58% |
8.23% |
11.87% |
27.27% |
-16.2% |
15.82% |
3.27% |
6.43% |
4.66% |
|
NZ Bonds |
11.03% |
4.19% |
8.54% |
3.47% |
15.77% |
7.64% |
7.52% |
5.36% |
6.98% |
7.10% |
|
NZ Property |
-24.67% |
9.31% |
-5.94% |
13.67% |
40.54% |
-20.23% |
16.91% |
-4.78% |
11.94% |
14.89% |
|
Cash |
6.96% |
5.54% |
8.60% |
9.09% |
9.11% |
8.59% |
5.73% |
5.59% |
6.69% |
5.51% |
|
Global Shares |
19.34% |
7.90% |
7.60% |
33.24% |
32.21% |
26.77% |
17.33% |
14.13% |
-14.51% |
-17.12% |
|
Global Bonds |
15.74% |
2.66% |
14.32% |
12.70% |
14.46% |
14.82% |
5.54% |
4.98% |
9.52% |
8.75% |
|
Figures are annual returns to June 30 each year. Source: NZSE 40 Gross Index, CSFB Government Bond Index, NZSE Property Gross CSFB 90 Day Bank Bill Index, MSCI World Accumulation Index (Hedged in NZ$), SSB World Government Bond Index. |
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For the previous 20 years for example, the annualised return of international shares (as measured by the MSCI World Free Gross Index) is more than 14%. Compare this to current long term New Zealand government stock, which matures in 2013, paying a mere 6.0%. This differential is potentially worth billions, not the $315 million that is in dispute at present.
Think of this scenario, would a European investor, with $1 million dollars invest solely into a country that sits on the 'Pacific Ring of Fire', is prone to earthquakes, whose economy relies heavily on dead animal by-products and forestry, and is extremely overexposed in the case of a foot and mouth outbreak or similar (Heaven forbid)? The answer is no.
The truth is that the current allocation of the Government Super Fund is not radical, nor irresponsible. In fact, professional investors would argue it is more irresponsible to not to invest into international equities.
With a current asset allocation toward international equities of 44%, the GSF fund remains conservative in nature compared to the asset allocation employed in much of the $40 billion managed fund industry in New Zealand. Within a balanced portfolio for example, an investor would expect to have between a 50% and 55% allocation toward international equities.
Remembering that the time horizon of such a fund is realistically 30-50 years, whatever happens in any single three month, six-month or one-year period for that matter, is largely irrelevant as long as the long term objective is achieved.
The current problems faced by the GSF are not unique. Many managed funds are also currently going through the same pains, with a sustained bear market in international equities. The principles by which they are investing the money however, as advised by the reputable Frank Russell Company, are tried and tested and will in the long term benefit those with cash invested. This is true for all managed funds at present, and those long-term investors who are sticking to their investment plan are those that will win out in the long term.
Tim Anderson is the business development manager at managed fund research house FundSource Research Ltd.
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