Investment Environment Report - December 2018
Posted On: Tuesday, 18 December 2018

In this video, Alice Mew, Senior Investment Strategist, NZ Direct Investment, talks to Mike Frith, Manager, Economics, about the global investment environment and its implications for the NZ Super Fund.

Watch a short video of Alice and Mike discussing the investment environment

Economic and market backdrop

The investor uncertainty and market volatility that characterised the first half of 2018 has carried on through the second half of the year. Almost all international equity markets are lower now than they were at the start of 2018. European, UK, and Japanese stock markets are down over 10%, Chinese stocks are down over 20%, while US stocks are flat to just negative. The NZX 50 is one of the very few indexes that has increased in price this year.

And the drivers of that volatility remain. Central Banks continue to tighten monetary policy, either to reduce accommodative policy support or in response to inflationary pressure, and reduce market liquidity. Interest rate increases, particularly in the US, have led to a reset of market expectations of asset valuations, which prompted significant market drawdowns in February and October.

In addition, ongoing trade tensions between the US and China, economic uncertainty in emerging markets, including China, and political uncertainty in Europe have all increased market concerns about the global outlook.

How has the Fund performed?

The Fund is strongly weighted towards growth assets as our endowments and long-term focus allow us to ride through market drawdowns, such as those experienced this year, in order to generate higher returns over the long run. Consistent with movements in global asset markets, Fund returns were negative in October. However, looking over a slightly longer period, the Fund has returned 3.5% over the past 12 months and averaged almost 11% return per year over the past three years.

The active investments made by the Fund, the investments we make over and above our passive benchmark, the Reference Portfolio, have continued to add value to the Fund, including through October. Over the past 12 months, to the end of October, active investments have added around 2.4% to overall Fund performance.

Fund activity

While the Fund remains strongly weighted towards growth assets, our overall use of active risk remains comparatively low, reflecting our view that many assets are fairly valued, at best. Consistent with this view, we have realised assets in our internally managed credit mandate, as loans made in the past few years have been repaid, and sold some timber assets in the USA and in New Zealand.

We are still finding attractive opportunities to invest in. Over the past six months or so we have increased our exposure to equity factors by almost NZ$2 billion, invested US$65 million in cloud-based waste and recycling technology company Rubicon Global, and increased our rural portfolio by $70m with the addition of a vineyard and winter dairy block.

Important Notice

This report has been prepared as a high level summary of certain matters of interest. It is necessarily generalised and may not be relied upon. It does not constitute financial, taxation, legal or professional advice. Any forward-looking statements in this report are subject to risks and uncertainties, and actual events may differ. No representation or warranty is given as to the accuracy or completeness of this report. To the maximum extent permitted by law, Guardians of New Zealand Superannuation as Manager and Administrator of the New Zealand Superannuation Fund (and its affiliates, officers, employees and agents) exclude any liability and responsibility in connection with this report.