New Zealand’s sovereign wealth fund gained 26% last year—thanks to the financial crisis

A multibillion-dollar reason to celebrate.
A multibillion-dollar reason to celebrate.
Image: Reuters/Nigel Marple
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The New Zealand Superannuation Fund, the country’s sovereign-wealth fund, has averaged a solid 8.8% annual return since it was founded in September 2003. But it gained 19.2% in 2012 and 25.8% in the fiscal year ending in June 2013. How come? CEO Adrian Orr told Institutional Investor in an interview that the financial crisis forced it to think differently about how it invests money.

The fund used to simply decide how much to invest in an asset class—putting 20% of its total assets in bonds, for instance. And then it would typically sit on those investments. But after taking a hit during the crisis, the fund now splits its money two ways.

Part of it is invested in much the same way as before, into a reference portfolio, which is meant to mimic major market indices and is split between different kinds of assets. 70% of New Zealand’s reference portfolio is tied up in global equities, 20% in fixed income, 5% in real estate and 5% in domestic equities. The fund only passively manages these assets.

But the point of the reference portfolio is merely to serve as a benchmark—a minimum acceptable return—for the rest of the fund, which is invested using methods such as “strategic tilting.” That means looking out for areas of the market that are over- or under-priced, and actively managing that investment until the assets hits a more sustainable price. Or it can mean investing in asset classes that wouldn’t typically be part of the fund’s portfolio. With these investments, it tries to beat the reference portfolio, creating an incentive to do better.

Admittedly, New Zealand is still a small fry in the world of sovereign wealth funds. Although the size of its portfolio, now at NZ$23 billion (US$19 billion) is hitting records, it’s a fraction of Norway’s or Saudi Arabia’s oil-driven mega-funds, worth hundreds of billions.