Thursday 11th October 2018
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New Zealand Superannuation Fund chief executive Matt Whineray is more concerned the government will lose its nerve as financial markets get choppier than he is about any short-term losses.
Stocks on Wall Street sold off last night, with the Dow Jones Industrial Average down 3.2 percent as global investors prepare for a new interest rate environment where the Federal Reserve is tightening monetary policy rather than flooding markets with quantitative easing.
For the $40.72 billion Super Fund, that daily noise is something it looks through and Whineray says there are no plans to reduce its heavy weighting towards global equities.
“The real risk to a fund like us is that we don’t have the discipline and the resources and the support from our stakeholders to be able to stay the course. The best time to have the conversation about how much risk you want is when the thing is not on fire,” Whineray told BusinessDesk.
Managing the fund's liquidity is among the biggest risks the fund faces. "We need to be able to pay our bills as they fall due and makes sure we can meet our commitments," Whineray said.
Maintaining the government's support is critical, given Finance Minister Grant Robertson resumed contributions to the fund this year after they were put on ice by his predecessor almost a decade ago. That means explaining to stakeholders what the fund faces and how it will respond.
The fund has generated an annual return of 10.47 percent since it was set up 15 years ago, the bulk of which was achieved in the recovery from the 2008 global financial crisis.
Whineray recognises financial markets may be in for a rougher ride as central banks around the world begin to lift interest rates and equity markets lose some of their shine, in particular given the fund's weighting toward growth assets. He wants people to understand there may be some “choppiness."
"There may be some pretty decent drawdowns but that is all within the range of expectations and the right response from us is not to at that point panic and shut everything down,” he said.
“The right response is to understand what that looks like before you go into it and know you have sized your strategy to be survivable - because that is the key.”
By way of example, in its annual report, the Super Fund outlined what would happen if the global financial crisis happened now and how it would weather such a savage downturn. Its modelling shows the fund would lose more than $20 billion - about half its value - but would recover within 20 months.
Whineray underscored that any new crisis will be different and the recovery will also be different.
The Super Fund references its investment portfolio to 80 percent global equities and 20 percent global fixed income.
Whineray said the portfolio's make-up goes through a rigorous process to assess whether investments match New Zealand law, international law applicable to New Zealand, international conventions New Zealand has signed and major pieces of government policy.
"We can get a pretty good picture of what New Zealand as a whole is concerned about, then define those standards and then go start applying those against companies that we own," he said, noting that some companies have been excluded for "horrible environmental stuff".
Among its biggest global equity investments is US bank Wells Fargo. The Super Fund has $154.4 million of Wells Fargo stock, accounting for about 0.4 percent of the portfolio.
Wells Fargo has come under fire for a sales-practices scandal that emerged in 2016. According to the Wall Street Journal, problems across many of its major business lines prompted the Federal Reserve to limit its growth. It has been investigated for a range of problems including improper customer charges by the Justice Department, Securities and Exchange Commission and other state and federal entities.
Whineray agreed the banking sector is coming under increasing scrutiny in New Zealand in the wake of things like Australia's Royal Commission into misconduct in the financial services sector. But he noted the fund's aim is to be able to change behaviour - through engagement - before it gets to the point of excluding companies.
"You can’t engage with a tobacco company and ask them to stop selling the one thing that they make. You can engage with others around social, environment and governance factors and see improvements. That is something our team is pretty active on. Before you get to the point where you finally admit defeat and exclude them from the portfolio, you are trying to change the outcome," he said.
Looking ahead, Whineray said disruption and innovation will be key challenges. The fund is looking at ways to use automation to lower operating risk and improve efficiency but it is also watching for major market changes that could potentially impact the portfolio.
For example, he noted a shift in capital markets where private companies are staying private for longer or not going public at all.
"That’s a concern for people who are dependent on public markets for a vast chunk of their portfolio, like us," he said.
"What does it mean that the IPO pace has been lower, there has been less issuance? Is there a hollowing out going on in these markets and how do you respond to that?"
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