New Zealand’s Super Fund is one of the best performing sovereign wealth funds in the world – and yet isn’t quite what it could have been. Rebecca Stevenson explains what it is and why it matters.
An investment vehicle to pay for our future pension payments has something to do with the All Blacks? Well, the Financial Times seems to think so. In a recent post, the financial publication labelled the NZ Super Fund “the All Blacks of the sovereign wealth fund world” and said the Kiwi rugby side is not the only world class team from New Zealand.
Big shoes to fill indeed. But is it accurate? The Financial Times’ piece points out the fund, headed by Adrian Orr, is the fastest-growing sovereign wealth fund in the world since its establishment in 2001. It also grabbed headlines closer to home when it announced a juicy 20.7% return (after expenses but before tax) for the financial year ended June 2017. It has achieved average annual returns of about 10% a year, a return not to be sneezed at. And yes, it has had some down years – I’m mostly looking at you Global Financial Crisis years – but overall it has done well, and now has some $35 billion in assets.
Not bad eh, considering that between 2003 and 2009, the government contributed $14.88 billion to the fund before the National government put a stop to the contributions. These payments are meant to resume in 2020, but anything could happen between now and then – so who knows when they might restart.
It is highly ranked against other sovereign wealth funds, and is also gaining attention for its move away from fossil fuels as it takes a stance against climate change.
What is the NZ Super Fund? It sounds pretty fancy, doesn’t it. Sovereign wealth fund. But all that means is it is owned by the state, you and me really. We are getting older overall, and the burden to pay for pensions will likely fall to young workers to pay. The super fund was started to help smooth the chunk of money needed to pay boomer retirees the pension. “These demographic changes mean that in order to keep funding universal superannuation, future generations face a much higher tax than their predecessors,” the fund’s annual report warns.
And how does it do this? Basically, it invests money in an attempt to earn back more, and pay for the universal superannuation every Kiwi can start receiving when they turn 65, a la Winston Peters. It is not means tested – this means it’s not linked to any income or assets you may have.
What is it investing in? Well, the fund is one of those “farming families” Fonterra likes to bang on about. The fund has $340 million invested in “rural land”, which includes about 21 dairy farms. It also owns a piece of Kiwibank and holds New Zealand assets worth about $4.9 billion, with significant holdings in the NZX big boppers Metlifecare, Fisher & Paykel, Fletcher, TradeMe, Spark, Meridian Energy and Z.
At the core of its investment strategy, and a theme that runs through many sovereign wealth funds, is that of patient investing. The fund sees its role to build long term wealth, and it wants to do this by not trying to jump on market movements. It’s not playing the share market, in a nutshell. But the reason it can do this, is it’s not singing for its supper. It knows where its next meal, or money, is coming from. The government. This allows the fund to invest when and where private investors may fear to tread, or fail to have the capital to do so.
Would we be better off not borrowing as much money, and not having a super fund? Orr, and Treasury modelling, says no. Orr says the fund will return an estimated 7-8% per annum, well in excess of the cost of government debt.
So how much money from the market did we miss out on by stopping those government contributions? Well, it’s a lot. The fund estimates it would have assets valued at about $57 billion if the payments hadn’t halted, with a return on investment of about $20 billion. The fund came to these numbers by assuming they made the same investments, but with more money to invest. Sob.
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