NZ Super Fund sets up 'investment hub' to create new local opportunities

The NZ Superannuation Fund is setting up an "investment hub" to discuss opportunities it can create with local partners such as iwi within New Zealand where it has a "hometown advantage."

Chief executive Adrian Orr said the fund was talking to decision-makers who have access to particular resources such as land, agriculture, and aquaculture where it could bring in the necessary capital and global capability to make the investment "go better, faster."

Under the fund's mandate, it can't be the controlling shareholder in a company but Orr said it was looking to do more co-investment locally with other partners as it is doing with the Accident Compensation Corp in Kiwibank, and other sovereign wealth funds as it did with its single largest investment, the Kaingaroa Forest.

The fund has already partnered with Ngai Tahu and New Ground Capital late last year in a $113 million new housing development, its first foray in the Auckland housing market that will see 200 new homes built by 2018.

Mr Orr said the fund had been "flat out" in the past 13 years investing in suitable opportunities of scale in New Zealand that had turned up at its door but these had now largely run out and it was now looking to create ideas that still stack up against its expected returns, liquidity and long-term horizon.

Infrastructure such as a second Waitemata Harbour crossing is an obvious example of the type of investment it could consider, he said, with Auckland being the pinch-point for national infrastructure needs over the next 30 years given its population is forecast to grow by another 716,000 by 2045.

The problem to date has been local and central government ownership has precluded third-party capital but Mr Orr sees that changing.

"I hope it does. There has been a change globally as this is not a unique New Zealand situation," he said. "The US is desperately short of infrastructure and has similar challenges with central and local government ownership. That's why they're now looking at creative ways of getting third-party capital which Australia and the UK have been doing for years through things like toll roads, toll bridges, and third-party provision of social services."

The fund has about 12% of its total capital allocated to New Zealand and while some might say it was already over-weight in its own country, Mr Orr said he's willing to shift that even higher for the right opportunities given globally it has become harder to find attractive investments.

"It's early days but we've been scoping how and what will work in a broad sense. I would expect two big ideas coming through in any one calendar year and over the next five years we may have got one or two of those away," Mr Orr said.

One is likely in the next calendar year, he said, without being drawn on what was being worked on.

The fund reported a reduced return of 1.89% for the June 30 2015/2015 financial year, dragged down by negative returns from global equities. That compares to a 14.6% return the previous year.

The fund, which will help pre-fund national superannuation payments from 2032, finished the June year valued at $30.1 billion, up $560 million from the previous year.

Mr Orr said there has been low growth and a volatile environment internationally which had dragged down global equity markets to negative returns through the year. The MSCI developed markets and emerging markets indices returning a combined negative 1.88%.

A return of 1.89% won't be the new norm given returns had already bounced back up to 10.3% on an annual basis in August, Mr Orr said, and he's still confident over the long-term of continuing the fund's current 9.72% a year since inception.

Overall investment returns are likely to continue on a low trajectory for some time given the abundance of capital worldwide looking for investment opportunities mean asset valuations are fully priced, he said.

A lot of capital had flowed in the US and Australasian equity markets, in particular, which means the price gap was non-existent, and in some case above fair value in those markets, he said.

Mr Orr still sees opportunities to invest at a fair value in Europe, the UK, and emerging markets.

The fund outperformed its passive reference portfolio benchmark by half a percentage point, or $155 million, during the year, primarily due to a strong performance by active investments in timber and infrastructure. The fund's 42% stake in forestry business Kaingaroa Timberlands, increased in value by $82 million to $1.49 billion.

(BusinessDesk)