Like all of our active strategies, strategic tilting is aimed at adding value to the Fund by improving long-term returns. To add value, we aim to buy low and sell high. So the Fund acts in a contrarian manner: we buy when others want to sell, and sell when others want to buy. We lean against the wind, anchored in our assessment of the ‘fair value’ of assets, to enhance the Fund’s risk-adjusted returns over long horizons.
Why is tilting a suitable strategy for the Fund?
- Mean reversion: Over the long run, we believe that markets provide returns commensurate with their risks. This link between risk and return allows us to identify a fundamental value for each market, and then determine the relative attractiveness of asset classes and currencies. So Strategic Tilting is premised on our core investment belief that expected asset class returns are partly predictable and may revert toward a mean over time.
- Long investment horizon: Strategic Tilting takes advantage of the Fund’s ability to maintain a long investment horizon, while weathering short-term market volatility. We have consistent long-term beliefs and a strong understanding of what to expect through a market cycle. So while we may sustain short-term losses, Strategic Tilting ultimately allows the Fund to maximise returns in the long run.
- Independent governance and risk management: We operate within well-specified risk limits set by our Board, with regular oversight by the Investment Committee. The Fund’s operational independence allows us to make investments on a purely commercial basis and adjust our asset allocation to best suit the Fund’s long-term horizon.
The Fund’s endowments and beliefs give us a critical advantage in implementing our tilting programme. For example, during the GFC, some investors with short-term spending commitments had to sell equities even after prices had fallen. Others, forced by regulators, were likewise required to issue or sell equity at very depressed prices. Yet the Fund’s long-term horizon allowed us to buy these cheaper equities and sell them down the line once prices had risen.
How does the Fund run the tilting programme?
Strategic Tilting is managed internally, using the expertise of our Asset Allocation, Economics, Portfolio Completion and Investments teams. Tilting decisions are driven by our view on how current prices compare with our internal estimates of the fair value of assets, based on long-term fundamental and economic factors. The relative sizes of our tilt positions are determined by how far current prices have deviated from our assessment of fair value and our assessment of relative confidence in tilting that asset.
We don’t attempt to incorporate market timing or momentum factors into our decisions. The contrarian nature of the programme means that the Fund will often sell assets that are rising in value and buy assets falling in value. These positions may be held for long periods, based on our core belief in mean reversion.
Tilting is a carefully planned programme overseen by our Investment Committee. Tilt positions are taken on the basis of expected long-term returns, after adjusting for risk and confidence. Our Board maintains regular oversight and approves the overall risk budget for tilting, the range of asset classes the Fund can tilt across, and maximum position sizes on individual asset classes.
How has Strategic Tilting performed so far?
Since its inception in 2009, the strategy has performed well both in terms of risk and return. The annualised value-add return since inception to April 2016 has been around 1.2% per annum, while the volatility of returns has been around 2% per annum. As at 30 April 2016, strategic tilting had added value to the Fund of NZ$1.7 billion.