The $30 billion NZ Super Fund is the best performing Sovereign wealth fund over the past five years, generating returns of more than 17 per cent a year. Those returns easily beat all other Sovereign wealth funds that publish their figures, according to a global study by JP Morgan. In the last three years alone, the fund returned an average of 21% a year. At that rate of return the fund would double every 3 ½ years.

The NZ Super Fund was set up in 2003 by the then Labour Government (The Cullen Fund) in an effort to underpin the national superannuation fund. Assisting in the continuation of the retirement benefit for all NZ’s after attaining age 65. Taxpayers contributed 14.8 billion to the fund before the present National Government stopped input at the time of the global financial crisis. The investment managers of the fund have added $19 billion (from investment returns) since starting and the fund has paid $4.6 billion in tax. Over the lifetime of the fund (12 years) returns have exceeded 11.0%. That timeframe has included the global financial crisis when market capitalisation of equities worldwide declined by over 50% in some regions – the worst financial crisis and recession since the great depression. Financial reporting at the time would have had us believe that the capitalist system was at an end.

There are some questions you might like to ask when considering your own investment time frames, strategy and portfolio.

•       Why would you take ‘such a high risk’ (88% in growth assets).
•       Why only 18% in NZ assets.
•       Why 36% in US assets – all factors pertaining to the NZ super fund.

For most people their investment time frame is over 30 years – including retirees. The mandate for the Guardians of the fund – is over 30 years. Disciples of Warren Buffet know that his ‘time frame’ is – life. Why is it then that people buy into such drivel in taking ‘less risk’ when they – get older? It’s because it’s an easy ‘sale’ – people buy the proposition because it sounds logical to them ‘to take less risk’ when they get old. The problem doesn’t manifest however until the ‘old’ person runs out of lifestyle because the purchasing power of their declining capital is much less – the adviser that made the easy and lazy sale is well gone – just like the investors capital, not lost but spent in maintaining cost of living. Investing in growth assets (like the asset allocation in the NZ Super fund) – is not high risk, it is high volatility. They are two different things and harder to explain than simply getting people to invest into conservative assets. Equity markets worldwide suffer temporary declines around every 5 years but the gains are inexorably permanent and far exceed declines, ditto NZ Super Funds. Capital loss is what people fear (retirees who invested into finance companies) and capital gain is what people in NZ want (residential property investors). The NZ Super fund has only 12% allocation to income assets (cash and bonds) and zero in direct NZ residential property – 88% is in growth assets. Equities, commercial property, infrastructure, farmland, timber, private equity. Why the US bias. US capital markets equate to over 50% of world capital markets – this is significant and cannot be ignored by any serious investor. The US market is by far the largest, the options therefore greater and the historical data more comprehensive. The ‘Guardians’ agree – with around 45% economic exposure to US, but New Zealanders like household names and local bias, when it comes to investing and US products when it comes to consuming (Apple, Microsoft, Johnson & Johnson).

Advantages the investment team at the NZ Superfund have over retail fund managers in NZ are: A long term mandate (short term gyrations in fund value are less contentious because there is no competition). They are not ‘rated’ by ‘Star Ratings’ at Morningstar – the press gives them minimal attention – especially when the funds are performing. There is no pressure on the funds from withdrawal (yet) and whilst the investment team are politically accountable there is no need to win market approval for new money – the fund has scale and the government is no longer contributing. The people at the NZ Super fund are a quietly performing best kept secret.

A double finance equation that has worked? Another Labour Government has innovated and initiated. The Cullen fund (NZ Super) and KiwiSaver are growing NZ’s capital markets (money invested into NZ businesses) and with it peoples investment knowledge. Each is important, both individually and collectively for the country. Businesses grow wealth for a country – not governments or residential investment property. Thankfully both KiwiSaver & the Cullen Fund have contributed significantly and are assisting with the diversification of our GDP. More to go yet to reduce the reliance on primary production and Fonterra in particular but new start-ups and burgeoning industries are emerging, people being employed and less migration to Australia. Most often when governments attempt to manipulate markets, industry or business, their flirtation with reallocation of resources ends in unfortunate and unintended consequences. I believe both KiwiSaver and the Cullen Fund are proving to be damn fine legislation and are providing us with practical financial initiatives because money is pouring into our capital markets and this will continue through all market cycles. The governance of our financial markets is also more regulated now through the efforts of the FMA. Recent investigation by the authority of a NZ fund manager has resulted in a $1.5m fine. I’m ever hopeful that a greater number of NZ’s will eventually have the confidence to discuss, debate and invest directly into capital markets in the same way that our farmers discuss primary production, businesses discuss marketing, productivity and profits – and retirees rue the returns of their term deposits. The high growth returns were available for all NZ’s over the last 5 years. The NZ Super Fund does not own any particular secret or specialist knowledge. Asset allocation is the key and the investment confidence to maintain a belief in capitalism.