Super Fund ‘borrowing from the future’
The New Zealand Superannuation Fund has achieved another doubledigit return, boosted by money from the Crown and booming financial markets.
Set up to help cover the cost of New Zealand’s future state pension costs, the fund topped $39 billion in the year to June 30, which was up $4b over the year. The fund said it returned 12.43 per cent after costs, before tax for the year, with average returns since creation of more than 10 per cent.
For the first time in close to a decade, the fund was boosted by contributions from the Government, resumed by Finance Minister Grant Robertson, although the tax paid by the fund meant the Crown effectively withdrew roughly as much as it put in.
Matt Whineray, who replaced Adrian Orr earlier this year as chief executive when Orr left to head the Reserve Bank, said conditions facing the global economy appeared to be becoming more challenging.
Global growth was slowing, inflation was picking up in some developed countries at a time when central banks were making credit less available, by withdrawing stimulus dating back to the global financial crisis. Nevertheless, Whineray said that, for the time being, conditions appeared to be having little impact on financial markets. ‘‘All this stuff doesn’t seem to have really manifested itself in the financial markets that significantly,’’ he said.
Returns seen by markets overall were ahead of what would be expected over a long-run average, with the passive benchmark the NZ Super Fund uses to compare itself to rising about 10 per cent.
Whineray said that for a number of years the fund had been warning that the above average returns seen by the benchmark comparison could not be sustained forever.
‘‘People are probably getting a bit sick of hearing it,’’ he said, adding that the impact would bite eventually. ‘‘You’re kind of borrowing returns, a little bit, from the future.’’
The long rise in asset values seen over close to a decade appears to have been fuelled by low interest rates, which are beginning to increase around the world.
Although some commentators have pointed to the risk of a sharp correction if financial conditions continue to tighten, Whineray said a more orderly decline in returns was possible.
‘‘You would expect over the longer run to see lower returns going forward. The end of a long run doesn’t always have to result in a massive crash,’’ he said.
‘‘You might end up with a more sustained or slower downturn or a period where P/E [price-earnings] ratios return to normal.’’
The fund had not positioned itself around a concern that markets would drop, but has increased liquidity – the amount of cash it can call on quickly – to position itself to take advantage of increased volatility.
‘‘We have lowered the amount of active risk being taken,’’ Whineray said.