The New Zealand Super Fund released its’ 2022 annual report earlier this month. Despite seeing total assets fall to NZ$55.7 billion ($32.2 billion) during fiscal year 2021-2022, still the fund added a record $4.5 billion in value above its reference portfolio benchmark via its’ , the Guardians, active management strategies.
The negative return follows a record fiscal 2021 return 0f 29% for the Super Fund.
The fund’s mission statement is to provide “sustainable investment delivering strong returns for all New Zealanders.” In fiscal year 2021-2022, the fund lived up to its’ mission statement by incorporating sustainable finance into key policies, defining objectives for its’ DEI (diversity, equity, and inclusion) strategy, and building out its’ data reservoir and capabilities, said CEO Matt Whineray in a letter accompanying the report.
To achieve its sustainable finance goals, the Super Fund changed the benchmark indices for the passive global equity component of its’ reference portfolio.
The fund discovered, “that we could improve the environmental, societal and governance characteristics of the portfolio, without compromising financial returns, by moving to a portfolio with fewer constituent stocks and better ESG ratings.”
The fund implemented a change of indices in June 2022 to reorientate its passively held global equities portfolio to be more sustainable. This saw that the fund moved away from the MSCI All Country World Investible Market Total Return Index as a benchmark, to using both the MSCI World Climate Paris Aligned Index, and the MSCI EM Climate Paris Aligned Index as the two indices for the global equity component for its’ reference portfolio benchmark.
The composition of the reference portfolio is the single biggest influence on the fund’s returns, because the choice of reference portfolio dictates the overall level of market risk that the fund takes on.
In addition to picking a new index, the fund achieves its sustainable outreach by actively excluding some companies and investment opportunities from its’ portfolio.
The fund excludes companies that manufacture cluster munitions, nuclear explosive devices, anti-personnel mines, automatic and semi-automatic firearms and firearm munitions, and companies that refine tobacco, cannabis, and whale blubber. The fund also does not invest in sovereign debt from nations that are widely condemned or sanctioned by the international community
The annual report, states that “in practice, the Reference Portfolio assets comprise just over half of our actual portfolio, with active investment strategies making up the balance. [The fund] chose a Reference Portfolio made up of 80% equities (or shares) and 20% bonds, with foreign currency exposures 100% hedged to the New Zealand dollar (NZ$).” Of the 80% equity exposure in the reference portfolio, only 5% is held in New Zealand-based companies, while the other 75% is made up of global equities.
Though active strategies provided outperformance of the reference portfolio, the annual report notes that, “taking active risk doesn’t guarantee that we will add value over the Reference Portfolio and, inevitably, some of our active investments will not add value.”
The reference portfolio returned -14.24% for the period, meaning that the active strategies employed by the fund’s investment team lead to the actual portfolio experiencing a 7.25% outperformance of the benchmark.
Stephen Gilmore, chief investment officer, in the report wrote, “as a long-term investor, with no withdrawals scheduled until around 2035, the NZ Super Fund is well positioned to ride out short-term market volatility. As a result, we have retained our long-term focus and continued to implement active investment opportunities that suit our long investment horizon.”
In the spirit of long-term horizon investing, the Super Fund launched the Elevate NZ Venture Fund in 2020. The Elevate Fund was established to increase the amount of venture capital available to young, innovative companies to develop New Zealand’s early-stage capital ecosystem and stimulate innovation and productivity.
The Elevate Fund is designed to support investment into New Zealand companies that have moved beyond the start-up, or ‘angel’ investor stage, and need capital for their next stage of development. It is aimed predominantly at series A and series B venture capital funding rounds, with investments ranging between $2 million and $20 million. The Elevate Fund has made $259.5 million of capital commitments since inception.
Outlined in the annual report, goals for 2023 include progressing the fund’s investment data initiatives, with a focus around building out its’ data analytics capability, further developing its’ Diversity, Equity, and Inclusion practices after adding a new head of diversity, equity and inclusion last year, and further integrating of the plan’s sustainable finance strategy into its’ investment process while providing strong risk adjusted returns.
The goals set for sustainability follow the plan joining the Paris Aligned Investment Initiative’s Net Zero Asset Owners Commitment, last October, which will see the plan decarbonize their portfolio, in an attempt to achieve net zero carbon emissions by 2050.
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Tags: DE&I, ESG, Net Zero Asset Owners, Net-Zero Alliance, New Zealand Super, Stephen Gilmore, Super Fund