NZ Super Fund returns 13.89% in 2014, warns that may wane   28 Jan 2015

NZ Super Fund returns 13.89% in 2014, warns returns likely to wane

By Fiona Rotherham

Jan. 28 (BusinessDesk) - The New Zealand Superannuation Fund, the sovereign wealth fund set up to help smooth the cost of universal superannuation between today’s taxpayers and future generations, returned 13.89 percent over 2014, ending the year at $27.54 billion, but warns lower returns are ahead.

Last year's return exceeded the 12.42 percent return for its passive reference portfolio benchmark and a 3.08 percent return for Treasury bills, which is the measure of the cost to the government of contributing to the fund instead of paying debt. Since inception in 2003, it has generated $11.4 billion more than the Treasury bill return of 4.66 per cent per annum and beaten its passive reference portfolio benchmark by $3.1 billion. or 1.11 per cent per annum.

It is also one of the country’s largest taxpayers, having paid more than $3 billion in tax over the past five years, including $850 million in 2014. The tax bill comes despite the government suspending annual capital contributions in July 2009 in order to pay down debt, making it a handy cash cow for the government.

As at Dec. 31 2014, capital contributions not made totalled around $11.68 billion. They are not forecast to re-start until 2020/21. Under the NZ Superannuation and Retirement Income Act, the government is meant to state each year why it hasn’t made the required annual capital contribution and what approach it is taking to ensure the Fund will be sufficient to meet super entitlements expected to be made over the next 40 years.

The Guardians of the Fund calculate that if government contributions had continued as set out in the legislation the Fund would now be worth an estimated $16.3 billion more or $43.4 billion. Excess returns relative to Treasury Bills would have been an estimated $5.2 billion more at $16.6 billion.

Chief Executive Adrian Orr said a heavy weighting to global equities and a decline in the New Zealand dollar had combined to deliver strong returns in 2014 but he expected returns to dip this year and beyond.

“Many asset classes are nearing full value, economic growth remains patchy globally, and it is becoming harder to find good investment opportunities,” he said.

The Fund has returned 19.6 percent per annum over the past three years and 9.95 percent per annum since inception, well in excess of the cost of government debt. Over the long term it’s expected to generate average returns of between 8 and 9 percent, based on current portfolio settings.

“While we are confident that the Fund will exceed its benchmarks over time, the very high returns of the last few years are unlikely to be repeated – they are the exception, not the rule,” Orr said.

Due to current global market volatility, the Fund has reduced its risk in recent months but continues to have a strong weighting in growth assets. That means stakeholders could see some sizeable changes of several hundred million dollars in the Fund’s value on a daily basis, but that is normal and within expected parameters, Orr said.

“There may be times when the Fund’s performance lags the market. We are prepared to weather this, sometimes for an extended period, in order to get the best long-term outcome,” he said.

The Fund is not expected to start making payments until 2029/30 although it will continue to grow after that which means it can take on more investment risk than many other funds and be counter-cyclical.

(BusinessDesk)

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