New Zealand Super white paper explores advantages of long-term investment

Long-term stance allows control over capital

A new white paper from the Guardians of New Zealand Superannuation, the state body which runs the country’s NZ$26.8bn (€16.5bn) Superannuation Fund, has set out what it sees as the advantages of being a long-term investor.

To start with, the fund defines who is NOT a long-term investor: “An investor whose key investment decision-making motivation is to avoid being a negative outlier in comparison to peer-funds, is not a long-term investor.”

Rather, it is defined as one “who can hold any investment strategy for as long as they wish”, the fund says in a paper by Sue Brake and Rishab Sethi. It’s a summary of one of a series of internal workshops the fund has held on investment issues.

This definition is consistent with the idea that long-term investing is not just about the horizon over which you hold an investment or measure returns, but also about the control that you have over your capital.

Here the fund cites a 2011 paper called Investing for the Long Run that was co-written by Knut Kjaer, the founding CEO of Norges Bank Investment Management, which speaks of “captured” capital.

Kjaer, who was president of RiskMetrics Group, is a member of the investment committee of the Dutch fund ABP and former chair of the CICERO Centre for International Climate and Energy Research Oslo among a raft of senior roles. ‘Investing for the Long Run’, which Kjaer co-wrote with Andrew Ang of Columbia Business School, goes on to point out that “the two biggest mistakes” of long-horizoninvestors, namely procyclical investments and misalignments between asset owners and managers, negate the long-horizon advantage.

Factors in taking control over capital, NZ Super says in its paper, include having low levels of agency risk and “not being driven by reputational or career concerns deriving from short-term comparisons”. Also, the ability to let currently mis-priced investment themes “play out” is an advantage for the long-term investor. So the fund is looking at issues such as: the unsustainability of current resource usage patterns; the inefficiency of emerging markets; and population ageing/demographic shifts.

The fund expects to beat the return of New Zealand Treasury Bills by + 2.5% over any 20-year moving average period. Over its first 10 years the fund was ahead by 4.26% p.a. or NZ$6.9bn.

NZ Super – whose payouts to the government aren’t projected to start until 2029-30 – has also published two other papers, on portfolio diversification and investment manager skill.

The paper on manager skill, in just a page and a half, outlines how the fund goes about identifying and then capturing investment manager skill, observing: “The best ‘centrifuge’ for separating skill from luck, is time.”

“Holding the workshops,
and developing these papers, has helped us provide a consistent vision to staff, to focus our time and resources appropriately and to avoid re-litigating some of the fundamental investment questions that investors deal with on an ongoing basis,” said Chief Investment Officer Matt Whineray.