NZ Super brings $6 billion AUM in-house, ends five mandates

NZ Super added $5.9 billion to its internal mandates in the financial year to June as it terminated five external mandates.

Total assets under management  (AUM) internally increased to $17.1 billion (NZ$29.1 billion) from $11.2 billion (NZ$19 billion) over the 12 months, according to the New Zealand sovereign fund’s annual report. 

The proportion of total AUM managed internally increased from 29% to 38% over the period, during which the fund’s total AUM grew from about $38.4 billion (NZ$65.4billion) to $45 billion (NZ$76.7 billion), helped by investment gains for the year of 14.9%. 

The report was published in late October.

ALTS MANDATES TERMINATED

The terminated mandates were two buyout mandates run by Coller International (since 2007) and KKR (since 2008); two merger arbitrage mandates run by Blackrock (held since 2016) and Neuberger Berman (since 2018), and a distressed credit mandate run by Canyon Capital (since 2010).

Collectively, the terminated managers produced a return of 0.01% below the fund’s passive benchmark, which comprises 75% global equities, 5% New Zealand equities and 20% global and New Zealand fixed income.

Roughly half of its AUM is allocated to this passive benchmark.

The fund appointed four new managers over the same period, allocating a total of $271 million (NZ$462) to them.  

The growth of internally managed assets has been matched by new hiring.

A total of 25 full-time employees were added in the year, bringing overall headcount to 238, up from 213 a year earlier and 189 in the 12 months to June 2022.

UNDERPERFORMANCE

The fund has been steadily growing the proportion of assets managed internally in recent years as the organisation has matured and increased in size, and its returns have added to the case.

In the last 20 years internal and external mandates have added a combined $10.2 billion (NZ$17.3 billion), after costs, to the size of the fund, compared to the passive reference benchmark. 

The returns provided by its internal investment mandates have exceeded those from the three strategy groups run by external managers in recen, generating annualised returns of 1.09% and 1.35% over five and 10 years, respectively.

Of the three externally managed strategy groups only the equity, credit and arbitrage allocation provided net gains this year, compared with the reference portfolio, adding 0.21%.

Real assets, a strategy covering opportunities in real estate, infrastructure, energy, timber and land, lagged the passive reference benchmark by 0.47% this year. The static targets group, which include global macro, opportunistic and venture capital allocations, trailed by 0.13%. 

The fund’s own internal mandates, which pursue many of the opportunities taken by the external managers, made a loss of 0.04% over the period.

Its worst-performing investment strategy was the opportunistic one, driven by its holding in LanzaTech, a Nasdaq-listed carbon capture company that lost 73% of its value over the period, but in which the manager still holds its stake.

“We continue to take a long-term view on the company,” the report noted.

“Within [the real assets group] infrastructure (development) was the opportunity that detracted the most in dollar terms. This opportunity involves infrastructure investments in greenfield opportunities,” it added.

EQUITY UNDERWEIGHT

The fund’s net performance trailed its reference portfolio for the second successive year, as the underweighting of global equity markets – 50%, compared to 80% in the reference portfolio – took a toll.

The passive portfolio this year gained 15.13%, helped by global equity market gains of more than 17%.

“The strong global equity performance meant it was challenging for our active strategies, many of which focus on private markets, to outperform the Reference Portfolio over the year,” the report noted.

The fund trailed its reference portfolio only on two other occasions in the past 20 years – 2013/2014 and 2007/ 2008.

During those two time periods, its active strategies generated 1.54% outperformance per year, and total additional gains of $10.1 billion (NZ$17.3 billion).