SWC Talks Exclusively to NZ Superfund CIO Whineray on Macro Headwinds

March 17, 2015 by Loch Adamson

Find out how @NZSuper 'tilts' its portfolio towards better prospects
Read our exclusive interview with @NZSuper's CIO Matt Whineray
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After the 2008-'09 financial crisis, the New Zealand Superannuation Fund made an effort to move more of its portfolio management inhouse and adopted a policy to 'tilt' toward better prospects within its reference portfolio strategy. Since inception the fund, today with $21.5 billion in assets under management, has returned over 10 percent annualized, which experts consider to be a healthy outperformance over peers.

CIO Matt Whineray spoke to the Sovereign Wealth Center's Victoria Barbary about the headwinds NZ Super and other state-owned investors are likely to face in the years ahead. The transcript has been edited for grammar, space and context.

SWC: What are the key challenges facing New Zealand Superannuation Fund in the years ahead?

We are similar to everyone else in that there are plenty of large macro issues around and interest rates are expected to normalize at some stage, but that's been made very challenging by lower inflation around the world and deflation in some places. On top of that you get some extra volatility that from the likes of ongoing uncertainty in Europe around Greece.

SWC: Are there any issues specific to NZ Super in this regard?

I'm not sure that we're not so different from many other investors in that we are thinking about what happens as the world tries to get back to a normal interest rate environment. Then oil is hard to price and everyone's trying to work that out. What are the knock-on effects of that? It's kind of murky.

SWC: Does your tilting strategy help you take advantage of volatility?

I think it does. The hard bit with a strategy like tilting is to create the discipline to put the positions on notwithstanding volatility. That's the hard bit. The way we've designed it is that we have a view of fair value and if the price moves away from fair value, then we will put a position on, and the way we've set up the decision-making process is that our default position is to put a position on, as opposed to saying 'Should we put it on?' There'll always be something about the market that will say that something's a bit different, or next week things will change because the ECB [European Central Bank] is going to do something or whatever.

But what we found is that structuring it so that our default is to put something on and only in exceptional circumstances depart from the model really aids the countercyclicality of the strategy. If you have a big fall in the markets, which says to put some more risk on '" risk has just gotten cheaper '" you've also got people running around saying risk isn't being rewarded any more. So we had to be deliberate in structuring the process so we can be countercyclical.

SWC: Does that contrarian disposition make for some contentious committee meetings?

It can be a scary place to be. The real test for us is going to be at the other end: where you think the markets are overvalued. For example, when we become short equities over our reference portfolio. It's probably easier to be long risky assets when risky assets are cheap, but if you short equities for a long period of time and the market continues to go up it could be uncomfortable.

We haven't really been through that cycle, yet in our tilting strategy. We've got the least amount of risk on for our active tilting strategy than we've had for the last five years, because we think that the markets are much closer to our view of fair value than they have been at any time over the last five years. If markets continue to rally, then we'll be in that position where we'll go short on equity versus the reference portfolio. That's the harder test, I think.

SWC: What are you thinking about fixed income markets at the moment?

My one exception to that comment I made about markets getting closer to our view of fair value is the fixed-income world. We continue to think that sovereigns are expensive and we've thought that for a while, so we've been short sovereigns versus our reference portfolio. That has hurt us in some periods. In the last few months interest rates have risen on some of those sovereign bonds and that's helped. But over the past few years, we've had a reasonably consistent short sovereign bond position and we continue to think that they're expensive.

The same with credit, we do tilt in the credit markets as well, but we don't have much of a position on there at the moment; some bonds are trading at negative yield, which is quite remarkable.

Our largest tilting positions are in the sovereign space. We're slightly long equities at the moment, most of that's driven by Europe and the U.K. Contrast to that our sovereign bond positions, which are expensive everywhere '" doesn't matter where you are.

SWC: With yields low, have you put money to work in relative value strategies?

Not really. Most of our fixed income we continue to manage passively. We do have some active allocations in the distressed space, and there may be some opportunities there in the future, particularly in the energy sector. We run an internal credit mandate, but that doesn't take a lot of credit risk. It tends to be more funding or liquidity trades, than relative value.

SWC: What are your thoughts about the increasing popularity of, or at least publicity surrounding, so-called smart beta? That is, harnessing risk factors in passive strategies to garner extra returns?

We've been doing quite a bit of work on that and thinking about how those types of exposures, which are really just different ways of cutting up your market exposures, particularly using value and low-volatility approaches. So to the extent you're getting paid to take some risk, we're happy to take some risk. We're giving it a decent shake at the moment '" we've been talking to a lot of our peers about it and just thinking about which strategies really fit with our fund endowments and whether or not we go with those.

If you decide that smart beta strategies fit you, you should really be in them in a serious fashion. I see a few people do smart beta and they put 2 percent of their portfolio in value and you think 'what is the point of that?' You'll just be creating a lot of administrative and internal monitoring for something that's not going to make a great deal of difference to your portfolio.

SWC: Do multi-strategy initiatives fit with what your overall strategy?

Probably not. A few years back we had some multi-strategy exposures, but we don't any more. Perhaps you should stand back and ask why is multi-strat attractive? Is it because people can't distinguish between the relative attractiveness of the different strategies that they might get and you stick it in a multi-strat that has a bit of everything.

What we've tried to do is spend a lot more time internally deciding where are those markets where we think those managers can generate some active return and focus more heavily on those rather than give broad mandates based on a view of manager skill. We've become a lot more targeted with our opportunities than we have been in the past.

SWC: How will falling oil prices affect investment opportunities?

We tend to have slightly broader, longer term strategies than the immediate effects of macroeconomic forces on countries, so we don't tend to move the portfolio around too much in response to some of those changes, other than if they cause pricing impacts. We'll look through the short-term to a longer-term fair-value approach. So we're not really set up to take a tactical asset allocation approach; our strategic tilting means we take a more medium-term approach.

SWC: That said, are there examples that you can point to?

What we do in response to those sorts of situations is to ask whether there is a particular market that has been made more attractive, and that's probably where the opportunities in, say, distressed credit in the energy sector comes from. So rather than going and picking countries, we'll ask which markets have been affected, where are people potentially forced sellers and where do we think that we can pick up assets at less than fair value. That said, we do have a small tilt toward emerging markets, but its not a significant amount of risk and its not really driven by energy prices.

SWC: Thank you for your time.


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