Turbo-charged returns can't last: Super Fund

Strong market returns experienced over the past five years are unlikely to continue into the future - but low interest rates are likely here to stay, the NZ Super Fund’s manager of investment analysis, Roland Winn, says.

Thursday, June 23rd 2016, 6:00AM

by Susan Edmunds

The fund has released a new report that explains its view of the global investment environment and the implications of that. Overall, it is taking less risk than it was a year ago.

Winn said the global economy was growing slowly, with only the US performing well from a global perspective. Global equity prices had recovered from the volatility of earlier in the year and most asset classes were now fairly valued, he said.

But while most of the asset classes and investments the fund was tracking were neither cheap nor expensive, there were now some parts of the market that seemed overpriced, such as European sovereign bonds where negative rates were offered for long terms.

Winn said that did not seem right. “At some point they will have to change to positive rates.”

He said although emerging markets were slowing, the fund was overweight in its exposure to them because they seemed cheap compared to developed markets.

The New Zealand economy remained closely tied to the fortunes of those emerging markets, he said.

Based solely on the numbers, market multiples were higher than they had been in the past, he said, which could indicate stretched valuations for local equities. But the composition of the market had changed, too.

But he said it would be a mistake to think New Zealand equities could continue its strong run of recent years. “It’s very dangerous to extrapolate out the very strong returns we have had in the last five years.”

He said it should be expected that returns would be lower in future.

Winn said there was a shortage of outright good investment opportunities so the fund was taking less active investment risk than a year ago, although its ratio of 80% growth assets to 20% defensive remained static.

The recovery from the GFC was continuing and interest rates would stay low for longer than a normal recovery, Winn said.

The fund is expecting to deliver 8% to 9% over the long term.

Tags: interest rates investment NZ Super Fund