NZ Superfund CIO Whineray on Change and Risk

New Zealand Superannuation Fund CIO Matt Whineray

The New Zealand Superannuation Fund (NZ Super) was founded in 2001 as a means to help smooth the tax burden associated with rising universal pension costs among the island nation’s generations. Later, it helped pioneer an innovative portfolio management policy to "tilt" toward better prospects within its allocation strategy. With $21.5 billion in assets under management, the fund is viewed as an exemplar of governance and investment acumen among sovereign wealth funds.

In the second part of an extended interview, CIO Matt Whineray spoke to the Sovereign Wealth Center’s Victoria Barbary about changes afoot at NZ Super. The transcript has been edited for grammar, space and context. Click here to read Part 1

SWC: You’re reviewing NZ Super’s reference portfolio, which serves as a benchmark for how you parcel out risk. What changes can we expect?

We’re currently in the middle of a five-yearly review of our reference portfolio. This probably won’t lead to any massive changes but might create a slightly simpler portfolio, and you’ve seen a little bit of that around the world with other funds that run a reference portfolio.

SWC: How is that likely to affect your risk management?

We’ve just finished putting in a new risk-budget approach, which was a really interesting way of getting the whole team involved in the allocation of risk to opportunities. We have five risk budget teams, staffed by different investment professionals to regularly consider the amount of risk we’re allocating, such as to infrastructure or timber. The actual investments within those opportunities are still the responsibility of the individual investment teams.

We wanted to be a bit more systematic about how we allocated risk. It’s been a really interesting process to see if we have the risk allocated to the right opportunities through time.

SWC: What’s your outlook on real assets and are you taking advantage of the illiquidity premiums they they can purportedly generate?

Yes, to the extent that there are liquidity opportunities created by regulatory capital changes and positions, those are interesting places for us — the CLO [collateralized loan obligation] warehouse type approach — where it might be too expensive for a bank to have illiquid assets on its balance sheet. We can fund it and get paid for providing that liquidity. We’re probably taking on a little less risk in that space than we have in the last 12 months, but we do think that there is a real opportunity to exploit.

We have the certainty of liquidity. We don’t have any outflows to the government for at least another 15 years and so we have a very clear view of what we need liquidity for. We maintain a liquidity buffer for market disruptions and the like, but with the excess liquidity that we have, we are able to exploit that opportunity and provide that if liquidity is being paid for in the market.

SWC: What kind of other non-tradeable assets are you interested in?

We are in a number of illiquid assets. We have forestry assets, some infrastructure, some private equity — although nowhere near the size of our peers. We’re very small and the broad buyout space is not what we’re chasing.

We prefer more flexible mandates and opportunities that we think are interesting. That’s where we spend our time, rather than saying we’re going to allocate 5 percent of the fund to buyouts. Investments in those illiquids aren’t really driven by a fear of volatility, it’s really just that we think that if we can improve the portfolio by selling down some listed, passive securities and buying a farm or a toll road or a private equity fund, then we’ll do that, as long as we get paid for taking on that lack of liquidity.

SWC: How are your relationships with private equity firms evolving?

We’ve changed that quite a lot in the last few years. We were much more traditional. Five years ago we would allocate $50 million and hope that we’d get it back plus a little bit more in 10 or 12 years. Then we changed our focus to becoming a little more opportunity-driven, we want to be able to change the amount of risk we’re allocating to an opportunity if that opportunity changes. One of the difficulties of the private equity structure is that if you think an opportunity — say a U.S. mid-cap buyout — is attractive and you make a commitment to someone with an investment period of five years, if the opportunity turns out not to be attractive or the opportunity dries up, you’re still committed to it and you’ve got a manager who’s probably incentivized to keep investing in it, because of the fee structure.

So what we said is that we’d rather have flexible mandates that are designed not to turn illiquid assets into liquid assets, but to say that if we get into a position where an opportunity is not as attractive as it was, we want to be able to turn around to that manager and say "don’t allocate any more to it." So whatever you’ve got in there, that’s fine, but don’t continue to allocate money or risk to an opportunity that we think is now less attractive than some of the others we’re looking at.

SWC: How will that affect the universe of firms you deal with?

We decided to have fewer managers and more strategic partnerships — I know that’s a nice buzzword — but what it means is that we want to be much closer to them, talking to them a lot more frequently about what the underlying drivers of the opportunity are. We want to have a mandate structure that allows us to change the allocations and stop or increase the capital that we have allocated to it.

SWC: Does that play to the strengths of certain firms?

The irony of that is that the people that are capable of managing those types of mandates are going to tend to be the larger shops like KKR [KKR & Co.], for example, who we have a flexible energy mandate with. The smaller funds will tend to say, "It’s easier for me if you just give the money to our fund and then we don't have to worry about allocation policy or managing a mandate alongside a fund". So you probably end up with the larger managers running those, but from our perspective the flexibility is really important.

It’s taken the private equity market some time to work this [arrangement] out, and no doubt the single-fund model is a more comfortable place to be from a general partner perspective — if you’ve only got one fund to worry about, you don’t have all these pesky investors wanting to know something all the time.

SWC: What’s your outlook on health care and technology? Are valuations frothy?

We haven’t done any health care emerging-market type of stuff, but in the alternative energy space we have done what you might call growth or expansion capital. The direct investment team has been doing some of that, in distributed wind generation, and most recently in a company called LanzaTech that converts waste products from steel mills into fuel. We think that there continue to be opportunities there.

SWC: Will volatility in the energy sector affect those kinds of investments?

As oil prices fall by half, that challenges the economics of some of those ventures as well. However, we continue to think there are opportunities. We are focused on opportunities where our patient capital can be valued. You reach a point where the venture capital funds have put in as much as they’d like to, but some of these energy companies in particular are capital-intensive and really could do with some patient capital before they go to market so they don’t go public too early, as opposed to some of the other tech sectors, which hardly take any money at all to get a company going. In those cases our capital isn’t differentiated at all. The alternative energy space is where there’s that intersection between the need for some patient capital and our goals.