Timber and Hedge Fund Allocations Shine for New Zealand’s Sovereign Wealth Fund

By Nick Hedley

The state-owned New Zealand Superannuation Fund says allocations towards timber, hedge funds and other active strategies helped it to partly offset broad market losses in the financial year ending June 30.

The fund’s portfolio shrank 7% to NZ$55.7 billion (US$34.2 billion) in the year as its passively managed reference portfolio, which makes up 60% of the fund and is heavily weighted towards equities, declined 14.2%.

On the other hand, the actively managed portfolio held up better, CEO Matt Whineray said in a statement.

“Our active investment strategies have performed extremely well and are a reflection of the excellent work and skill of the team over many years,” he said.

Over the past 10 years, the fund has generated returns of roughly 12% per annum. Since it started investing in 2003, returns have averaged 9.7% a year.

Whineray said the actively managed portfolio outperformed thanks to its strategic tilting, timber, global macro, tactical credit and equity factors mandates.

The strategic tilting allocation saw decent returns due to higher bond yields as central banks hiked interest rates to counter inflation.

“Timber also continues to outperform, headlined by our investment in Kaingaroa Timberlands – a radiata pine forest in the central North Island of New Zealand,” Whineray said.

“Our global macro opportunity, a hedge fund strategy that bases its holdings primarily on the overall economic and political views of various countries or their macroeconomic principles, and our internally managed tactical credit mandate, also delivered strong returns. Tactical credit investments provide debt funding while using downside protection to mitigate or prevent a decrease in the value of an investment.”

Meanwhile, NZ Super Fund’s portfolio of factor-based equity strategies in developed markets “had a very strong year, reversing prior under-performance”.

An allocation to the “value” factor, which had historically weighed negatively on performance, started to reverse in late 2021 after global equity markets began to pull back from their all-time highs, Whineray said.

“The periods of extraordinarily high returns, like 2020-2021 when the fund returned 29%, are behind us. In effect, we were bringing forward future returns in an environment which combined both monetary and fiscal stimulus.”

Higher interest rates would weigh on market performance and increase the fund’s internal hurdle rates for making direct investments in companies.

“We believe we’re entering a lower return period but remain confident our long-term approach will continue to deliver value to New Zealand.”

In July and August, the fund recovered some lost ground, reaching NZ$57.3 billion (US$35.2 billion).