The negative reaction to the New Zealand Superannuation Fund’s June 2008 year results tells us more about public perceptions than the fund’s performance.

The disapproving response indicates that we are not used to dealing with large organisations and have difficulty coming to terms with volatile investment markets.

This is unfortunate because the Super Fund’s investment strategy has been successful and individual investors can learn a great deal from its approach.

The Super Fund, also known as the Cullen Fund, had a negative return of 4.9 per cent for the June 2008 year compared with positive returns of 14.6 per cent and 19.2 per cent for the two previous years (see table).

In money terms this represents a 2008 year reduction in value of $716.5 million compared with surpluses of $1618.7 million ($1.62 billion) and $1441.4 million ($1.44 billion) for the two previous years.

These performances have to be looked at in the context of the fund’s objectives and investment horizon.

The most important decision for all investors is to determine their objectives and, as a consequence, their optimal asset mix or strategic asset allocation.

The objective of the New Zealand Superannuation Fund, which was established under the New Zealand Superannuation and Retirement Income Act 2001, is to partially fund the future cost of the country’s superannuation payments.

The Government allocates approximately $1.5 billion to the fund each year and its investment objective is to outperform the NZ Treasury bill interest rate by 2.5 per cent per annum over rolling 20-year periods.

As a general rule investors with a long-term horizon will invest a high percentage of their assets in growth assets whereas those with a shorter term view will have more focus on income or fixed-interest assets.

This is because growth assets are more volatile, but produce higher long-term returns, whereas income assets are more stable and give greater certainty that capital will be preserved.

Thus younger investors with a long-term horizon should have a high percentage of their investments in growth assets whereas retirees should have a stronger bias towards less volatile income assets.

As the Super Fund has a long-term objective it has only 19.4 per cent of its assets in income securities with the remaining 80.6 per cent in the growth area. This is a high-risk approach but totally consistent with its 20-year horizon.

As the accompanying table shows the four major growth asset classes – NZ equities, global large cap equities, global small cap equities and emerging market equities – produced fantastic results in the 2006 and 2007 years but the first three had negative returns for the June 2008 year.

The spectacular 83.1 per cent return from commodities in 2008 was mainly due to the fund’s exposure to oil and other petroleum products. This year will be much more difficult for commodities unless the Super Fund has switched its emphasis to gold.

The importance of a diversified portfolio is clearly evident from the Super Fund’s 2008 result. Even though all of its three major sharemarket exposures, representing 49.6 per cent of total assets, had negative returns in excess of 13 per cent the overall result was much better partly because of the buffer created by its fixed-interest portfolio.

It is clear from these figures that the fund’s most important decision is the percentage invested in each asset class rather than individual securities. This applies to individual investors as well as large sovereign funds.

Even though 2008 was a disappointing year the emphasis on growth assets has worked because the fund has had an annualised return of 10.3 per cent, compared with its benchmark of 9.3 per cent per annum, since it started investing in September 2003.

All the growth assets have made a big contribution to these returns with emerging market equities producing 29.4 per cent per annum since inception, commodities 17.3 per cent, global small cap equities 13.4 per cent, private markets 12 per cent, NZ equities 11.3 per cent, global large cap equities 10.7 per cent and property 10.1 per cent.

The performance of global large cap equities is a concern because it is the largest asset class by far, the fund underperformed the MSCI World Index by a wide margin in 2008 and managers have added little value to the benchmark index since the fund began investing.

By contrast, the fund’s New Zealand equity managers have added value to the benchmark index since inception but the NZ sharemarket has had disappointing returns, particularly in 2008.

The Super Fund now faces the dilemma whether it sticks to its long-term strategic asset allocation or makes adjustments for current market conditions. The latter is called tactical asset allocation.

Most individual investors should have reduced their exposure to equities over the past 12 months but large, long-term funds are reluctant to take this approach. There are a number of reasons for this, including the fact that directors are hesitant to endorse such an important decision and there is a reluctance to deviate from the long-term strategic asset allocation.

The fund confirmed its views on this issue during the week when chairman David May said: “The fund deliberately invests in global equity markets because we expect that they will perform best over the long term. The fund’s long-term horizon means it is well placed to withstand ups and downs in the market.

The board remains confident that this remains the right approach and that the appropriate response to the credit crisis is to remain calm and ready to benefit from the more favourable risk and liquidity premia in the years ahead.”

This long-term focus could be a problem if we have a repeat of the 1970s when the United States S&P 500 Index peaked in January 1973 and didn’t return to the same level until June 1980, the Australian All Ordinaries had a high in June 1972 and didn’t return to this level until August 1979 and the NZX went sideways, in benchmark index terms, from July 1974 to April 1980.

This would cause a problem for the fund because of the inability of its managers to consistently outperform the benchmark indices.

But the good news is there are a huge number of similar sovereign funds – all with a strong emphasis on growth assets – and their enormous buying power should ensure the next few years are not a repeat of the 1970s.

Another sensitive issue is the proportion of funds allocated to New Zealand. As at June 30, 2006, the mix was 24.1 per cent New Zealand and 75.9 per cent offshore but no detailed figures have been released since then.

The problem is that the Super Fund is growing more rapidly than New Zealand’s capital markets, particularly the sharemarket.

The total value of all domestic listed companies increased from $48 billion to $48.8 billion between September 2003 and June 2008 while the Super Fund’s investment in New Zealand went from nil to nearly $1 billion over the same period.

The size of the fund, which is forecast to reach $100 billion by the mid 2020s, will also become a problem from a public perception point of view. A negative return of 4.9 per cent will be reported as a disastrous loss of $4.9 billion when the fund is worth $100 billion.

But the flip side of this is that a positive return of 14.6 per cent, which was achieved in 2007, would represent a surplus of $14.6 billion. This return will only be achieved if the Super Fund has a high exposure to growth assets.

NZ Superannuation Fund – Built to withstand big storms

Asset Classes

Asset allocation*

Performance (after fees)






Growth assets        

NZ Equities





-Global Large Cap Equities





-Global Small Cap Equities





-Emerging Markets Equities










-Private Markets










Income assets





 -Fixed Interest





 Total Fund Return





 Total Return ($m)





 Fund Size ($m, Year end)





*As at June 30, 2008