Unpredictable drivers of change can be devastating to economies and markets, but they can also support and accelerate innovation and add momentum to global megatrends that provide opportunities to investors.
At AsianInvestor’s Thematic Investing Forum on March 24, Rishab Sethi, manager of external investments for the New Zealand Superannuation Fund — which manages around $40 billion in assets for the New Zealand government — discussed how a thematic approach to investment can future-proof portfolios for all market conditions.
“We have spent a lot of time focusing on these structures and what they might mean for the portfolio. It's not so much about the right or the wrong, it's also about just making sure that we've identified the right things to look out for and continue to assess them for their macro and portfolio effects,” said Sethi.
The first quarter of 2022 has been rife with structural market shifts as soaring inflation, rising interest rates, the climate crisis, Covid, and geopolitical factors create instability in the global markets, he pointed out. This brought the fund's attention to five themes: inequality reserves, work and lifestyle changes, fiscal and monetary policy coordination, the changing role of China, and blockchain technology adoption.
FIVE MAIN THEMES
“There has been a long-term trend for rising multi-dimensional inequality, and we see that either slowing or reversing in a post-pandemic world,” said Sethi. “That could arise from policies, targeted income or wealth redistribution, and of course, that has impact on corporate earnings, on consumption, rates, savings rates, and possibly on productivity as well.”
A second theme for NZ Super was Covid-accelerated changes to people’s working patterns such as working from home. Specifically, the fund is focusing on the implications these changes will have for both its current and future investments in real estate, infrastructure, and transport, he said.
NZ Super is also focused on fiscal and monetary policy coordination as a third theme. As policymakers have been responding to the effects of the pandemic, there has been a little bit of waning central bank independence in the use of fiscal stimulus — at least in the initial Covid shock, which was quite pronounced - and working hand-in-hand with monetary policy, according to Sethi.
“That clearly has implications for our assumptions around the levels of interest rates around inflation and just generally about how policymakers respond to crises,” he said.
The fourth theme is the changing role of China and the consequences of a more internally focused but also more assertive Chinese stance with respect to changes in geopolitical power bases.
“The last one is around the adoption of blockchain technology and what that might mean for existing business models — especially in the financial services and social media,” he said.
An incredibly important and central topic to all of NZ Super’s investment framework is ensuring that the decisions it makes support its sustainability goals.
For a long time now, the fund has had a fully articulated Responsible Investment Framework. Sethi highlighted that there was a measurable pivot towards a more centralised effort on sustainable finance last year
“To be specific, we're trying to integrate ESG (environmental, social and governance) considerations into our investment decisions with the very clear intention of advancing sustainability outcomes, while also ensuring that we fulfil our financial purpose. We are considering the impact of ESG both on our investments and also the impact of our investments on society and the environment,” he said.
NZ Super's ambition in the past year has been to accelerate sustainable finance. Sethi said the fund has paid more attention to sustainable transition investments — such as investing in growth-stage equity companies focused on sustainability impact as well as a commercial return.
In asset classes like real estate and infrastructure, NZ Super has been looking at energy transition renewables, green fuels, and decarbonisation as some of its priority sectors.
“On the real estate, we’ve been looking at things like affordable housing, repurposed buildings, urban regeneration, and environmentally focused hotels, as well as exploring some new ideas like carbon credits,” said Sethi.
NZ Super has long had a reference portfolio with a large tilt towards passive equities and has really been focused on broad markets with focused exposure, he said.
“What we're now trying to do is to see whether we can get similar access to the market risk premium to craft a new set of exposures that doesn't compromise on the beta but allows us to essentially achieve an even better ESG profile. So those are active research and investment programs that are currently underway,” he said.