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.