New Zealand Super Fund Reports -6.99% Loss in Fiscal 2021

The New Zealand Super Fund’s assets fell to NZ$55.7 billion ($32.2 billion) during fiscal year 2021, while the fund reoriented the portfolio towards sustainability and moved forward on Diversity, Equity, and Inclusion.

The New Zealand Super Fund released its’ 2022 annual report earlier this month. Despite seeing total assets fall to NZ$55.7 billion ($32.2 billion) during fiscal year 2021-2022, still the fund added a record $4.5 billion in value above its reference portfolio benchmark via its’ , the Guardians, active management strategies.

The negative return follows a record fiscal 2021 return 0f 29% for the Super Fund.

The fund’s mission statement is to provide “sustainable investment delivering strong returns for all New Zealanders.” In fiscal year 2021-2022, the fund lived up to its’ mission statement by incorporating sustainable finance into key policies, defining objectives for its’ DEI (diversity, equity, and inclusion) strategy, and building out its’ data reservoir and capabilities, said CEO Matt Whineray in a letter accompanying the report.

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To achieve its sustainable finance goals, the Super Fund changed the benchmark indices for the passive global equity component of its’ reference portfolio.

The fund discovered, “that we could improve the environmental, societal and governance characteristics of the portfolio, without compromising financial returns, by moving to a portfolio with fewer constituent stocks and better ESG ratings.”

The fund implemented a change of indices in June 2022 to reorientate its passively held global equities portfolio to be more sustainable. This saw that the fund moved away from the MSCI All Country World Investible Market Total Return Index as a benchmark, to using both the MSCI World Climate Paris Aligned Index, and the MSCI EM Climate Paris Aligned Index as the two indices for the global equity component for its’ reference portfolio benchmark.

The composition of the reference portfolio is the single biggest influence on the fund’s returns, because the choice of reference portfolio dictates the overall level of market risk that the fund takes on.

In addition to picking a new index, the fund achieves its sustainable outreach by actively excluding some companies and investment opportunities from its’ portfolio.

The fund excludes companies that manufacture cluster munitions, nuclear explosive devices, anti-personnel mines, automatic and semi-automatic firearms and firearm munitions, and companies that refine tobacco, cannabis, and whale blubber. The fund also does not invest in sovereign debt from nations that are widely condemned or sanctioned by the international community

The annual report, states that “in practice, the Reference Portfolio assets comprise just over half of our actual portfolio, with active investment strategies making up the balance. [The fund] chose a Reference Portfolio made up of 80% equities (or shares) and 20% bonds, with foreign currency exposures 100% hedged to the New Zealand dollar (NZ$).” Of the 80% equity exposure in the reference portfolio, only 5% is held in New Zealand-based companies, while the other 75% is made up of global equities.

Though active strategies provided outperformance of the reference portfolio, the annual report notes that, “taking active risk doesn’t guarantee that we will add value over the Reference Portfolio and, inevitably, some of our active investments will not add value.”

The reference portfolio returned -14.24% for the period, meaning that the active strategies employed by the fund’s investment team lead to the actual portfolio experiencing a 7.25% outperformance of the benchmark.

Stephen Gilmore, chief investment officer, in the report wrote, “as a long-term investor, with no withdrawals scheduled until around 2035, the NZ Super Fund is well positioned to ride out short-term market volatility. As a result, we have retained our long-term focus and continued to implement active investment opportunities that suit our long investment horizon.”

In the spirit of long-term horizon investing, the Super Fund launched the Elevate NZ Venture Fund in 2020. The Elevate Fund was established to increase the amount of venture capital available to young, innovative companies to develop New Zealand’s early-stage capital ecosystem and stimulate innovation and productivity.

The Elevate Fund is designed to support investment into New Zealand companies that have moved beyond the start-up, or ‘angel’ investor stage, and need capital for their next stage of development. It is aimed predominantly at series A and series B venture capital funding rounds, with investments ranging between $2 million and $20 million. The Elevate Fund has made $259.5 million of capital commitments since inception.

Outlined in the annual report, goals for 2023 include progressing the fund’s investment data initiatives, with a focus around building out its’ data analytics capability, further developing its’ Diversity, Equity, and Inclusion practices after adding a new head of diversity, equity and inclusion last year, and further integrating of the plan’s sustainable finance strategy into its’ investment process while providing strong risk adjusted returns.

The goals set for sustainability follow the plan joining the Paris Aligned Investment Initiative’s Net Zero Asset Owners Commitment, last October, which will see the plan decarbonize their portfolio, in an attempt to achieve net zero carbon emissions by 2050.

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Tags: DE&I, ESG, Net Zero Asset Owners, Net-Zero Alliance, New Zealand Super, Stephen Gilmore, Super Fund

The SEC approved a new rule last week that would require institutional investment managers – including mutual funds, exchange-traded funds, and certain other registered funds — to disclose proxy votes related to executive compensation or “say on pay” votes.

Initially proposed in September of 2021, the rule is designed to modernize and standardize Form NP-X, an annual form that discloses how funds vote proxies related to assets they hold and increase transparency on executive compensation proxy votes.

Prior to the rule, registered funds were already required to disclose all of their proxy votes. Now, institutional investment managers will be required to disclose their proxy votes on matters of executive compensation specifically, according to Sarah Bessin, a deputy general counsel at the Investment Company Institute.

William Birdthistle, the director of the SEC’s Division of Investment Management, explained during a SEC open meeting prior to the 3-2 vote on Nov. 2, which passed the rule, that opening investment manager voting records on executive pay could help reveal potential conflicts of interest that fund managers have. He also noted that funds currently report proxy votes using different formats which makes quick comparisons between funds difficult, an issue this rule also would mitigate.

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The rule is one of the remaining regulatory changes that was required under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

The full text of the rule is available here.

Jessica Wachter, the director of the SEC’s Division of Economic and Risk Analysis, said during the meeting that currently reporting is inconsistent and different managers use different abbreviations, structure, and data language.

The rule requires managers to format consistently by using the same categories. They will also be required to file using an xml data language.

SEC Commissioner Caroline Crenshaw said in the same meeting that the rule will allow stakeholders to know how their proxy votes are being cast and will discourage fund managers from voting against their clients’ interests.

Shares out on loan, which cannot be voted on, must also be disclosed, and this provision received some negative feedback from the industry. Wachter noted that this provision could lead to reduced income from loaning shares, especially near vote dates

While ICI is “still analyzing the implications of the final rule,” Bessin says that ICI is disappointed that the loaned shares provision survived into the final rule. She says that this requirement will likely create investor confusion and does not provide any “meaningful information” and that it is “not clear that there is a demand for this information.” She notes that this disclosure requirement is complex because many factors go into the consideration of whether to recall loaned securities, which can’t readily be reduced to a single metric.

Bessin says that ICI supports efforts to modernize Form NP-X and that the final rule reflected some of the comments they made in their comment letter. The initial proposal had more disclosure categories and a more complicated categorization process, which was later simplified, according to Bessin.

Bessin also says that the consequences for smaller funds and advisers could be severe. Some who don’t use a vendor to prepare form NP-X may have to in order to comply with the new rule.

Institutional Shareholder Services, a proxy vote logistics provider, and the parent company of Chief Investment Officer, also discouraged this provision in a comment letter they filed last December. They said that disclosing shares on loan “would outweigh any benefit that would be derived from this exercise,” and recommended a requiring a summary of loan activity as an alternative.

Glass Lewis, another leader in proxy vote services, also submitted a comment letter last December. They also cautioned against adopting the loaned shares provision, and said that collecting this information from all relevant actors would be a costly enterprise.

Tags: Dodd-Frank, Executive compensation, proxy voting, Regulations, Securities and Exchange Commission