Super Fund’s ‘beat-the-market’ brief not worth risk
The New Zealand Superannuation Fund should stop trying to beat the market. Last week’s spat between Mr English and the Super Fund regarding its chief executive’s pay is another reason why it should be turned into a passive index-linked fund.
The Cullen fund attempts to beat the market. To do so it needs some seriously well-paid investment professionals. You do not beat the market on B-team pay rates.
You quickly drop on to the C-list if your portfolio faces constant political interference.
First, it was whether it should invest more in New Zealand. Then the fund should disinvest in politically unpopular shares. Now it should get A-grade results with the B-team pay rates. This will never stop.
The taxpayers would be better off if the Super Fund invested in passive index-tracker funds. These funds buy a portfolio with the same weighting as the entire share market and trade as little as possible. This minimises management expenses and trading fees.
Yes, a super fund that is a passive indexlinked fund would never beat the market, but it would never under-perform it, either, and would be cheaper to run.
An accountant or two would be needed at the Treasury to send and receive the cheques, read the annual reports and audit documents to make sure the money is still there.
The Super Fund has beaten its reference portfolio since 2013 but before that it was as much down as up. Any investor who tries to outperform the market can only do so by taking on more risk.
The poor performance of the Super Fund around the global financial crisis indicated that its extra risk came back to bite it relative to its more conservatively invested reference portfolio.
I hope there is not another share market crash when the fund is due to start paying out in 10 years. That extra risk, which is the flipside of trying to beat the market, may come back to bite taxpayers.
Hedge funds have trouble beating the market for more than a few years in a row after management fees, despite the top hedge fund managers earning more than $1 billion a year. To get on the top 25 list of hedge fund managers you need to earn at least $400 million a year.
That makes whatever the New Zealand super fund is paying its team to beat the market small potatoes.
The only investors who consistently beat the market are US senators. Their previously mundane share portfolios turn into tigers and outperform the top hedge funds after they assume office.
Congress is exempt from insider trading laws. That is the secret to beating the market.
To beat the market, you must invest serious money to dig up information no one else has yet discovered and act on it before it has become out of date or someone else finds that out, too.
The alternative is to minimise your trading costs and the risk in your portfolio and accept that same return as the entire share market. There is nothing gained but there is nothing lost as well.
How common is it to beat the US share market? For the three years ended March 2014, 14.1 per cent of large-cap funds, 16.3 per cent of mid-cap funds and 25 per cent of small-cap funds beat the market for three consecutive 12-month periods.
Random chance would suggest a rate of 25 per cent. After five years, only two of those funds are still beating the market.
Taxpayers contributed $14.88b to the Super Fund from its inception in 2001 to the suspension of contributions in 2009.
In the nine years in which contributions were made, the company tax rate of 28 per cent could have been up to 10 percentage points lower but for those investments. Imagine how much richer New Zealand would be if investors only paid an 18 per cent company tax rate on building their businesses.
The Super Fund must beat the market every year to make up for the deadweight social cost of its funding through taxes and a premium for the investment risk added to the Crown’s portfolio.
The taxpayer should quit while the going is still good. The Super Fund should become a passive share index-tracking fund that minimises management expenses and the risk in the Crown’s portfolio.