Super Fund changes asset allocation

The Fund will target a combined weighting of 20% to alternative assets and property by June 2007, by which time the Fund is expected to be worth $12 billion. Beyond June 2007, the allocation to alternative assets and property is expected to increase to 35% of the total Fund.

This compares with the current allocation of 13% of the Fund in these areas. The Fund's value as at February 28, 2005 was $5.75 billion.

Chairman of the Board of the Guardians of New Zealand Superannuation, David May, said the Fund, which has a long term horizon and therefore no immediate requirement for liquidity, is well suited to holding a substantial allocation in these types of assets.

"We believe that by substituting a proportion of the Fund's present allocation to listed equities with illiquid, uncorrelated assets, we can lower the long-term risk of the Fund, without compromising returns," said May.

The table below compares the current strategic asset allocation with both the target levels as at 30 June 2007 and the expected longer-term direction for the Fund.

May said that the decision to phase in the increased allocation to alternative assets over several years reflected the significant implementation challenges associated with investing in alternative assets.

"Developing appropriate access to these highly specialised sectors takes time. In addition, considerable care needs to be taken in establishing the terms upon which investors commit funds in order to assure they are appropriately rewarded for the risk they take."

May said that, in most cases, investing in these areas involves committing capital for future investment, which is drawn down as opportunities arise. As these opportunities are often lumpy, with the precise timing hard to predict, he cautioned that it is not practical to be too precise about the actual allocation at any future point in time.

The increased allocation to these sectors coincides with steps taken to begin building the Fund's portfolio in the New Zealand private equity and global infrastructure markets.

Appointment of Quentin Ayers
The Fund also announced the appointment of Quentin Ayers Pty Ltd, a specialist alternative assets advisory firm based in Sydney, to review investment opportunities in the New Zealand private equity market.

Provided that appropriate opportunities are available, it is the Fund's intention to invest up to $100 million into New Zealand based private equity funds, or related transactions, over the next three to five years.

As part of its mandate, Quentin Ayers will liaise with New Zealand-based private equity funds seeking to raise capital and, on behalf of the Fund, undertake detailed analysis of those that appear to meet the Fund's criteria for investment.

Gary Lines, executive director of Quentin Ayers, said: "We are very pleased to be working with the New Zealand Superannuation Fund on this initiative. We believe that the New Zealand private equity market is still developing, but should provide the Fund with attractive opportunities."

At this stage the Fund is exploring the most appropriate strategy for building an allocation to private equity funds outside New Zealand and expects this analysis to be completed by the end of 2005.

Appointment of Capital Partners
The Fund has also appointed Sydney-based infrastructure specialist firm, Capital Partners Pty Ltd, to manage a global infrastructure mandate on its behalf.

Capital Partners has been given a broad mandate to acquire infrastructure assets in a range of sectors, both in New Zealand and globally. The allocation to infrastructure assets is expected to be in the range of 2-5% of the Fund, with a target allocation of 3% by June 2007, subject to the sector continuing to produce the returns that have made it attractive to investors over the last decade.

Capital Partners was selected for its analytical rigour in valuing infrastructure assets, its experience in reviewing infrastructure investments around the world, and its ability to work closely with the Fund to build a well diversified portfolio of assets on attractive yields. The Fund's infrastructure portfolio is expected, over time, to be built up through exposure to listed assets, pooled vehicles and through direct participation in the purchase of assets.

Commenting on the appointment, May said: "Infrastructure is a natural part of our long term investment strategy and today's announcement is a very important step in building the Fund's exposure to the sector."

Peter Doherty, executive chairman of Capital Partners, said: "We are delighted to be appointed to work with the New Zealand Superannuation Fund. We believe the infrastructure sector to be in the early stages of a significant expansion and this will offer long-term benefits to early participants."

Update
The appointment of Capital Partners brings the Fund's total number of external investment managers to 20.

The Fund's investment objective is to generate a return of at least 2.5% p.a. more than the risk free rate (measured as the rolling yield on 90-day Treasury bills) over rolling 20-year periods. Since the Fund began investing on 30 September 2003, the annualised earning rate to 28 February 2005 was 13.11% compared to the risk free rate of 5.75%, on the same annualised basis. In the 17 months since inception, the Fund has generated $756 million in investment income (after fees but before NZ tax).

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