Our target operating model is based on a commitment to active investment management where we have a strong expectation of meaningful risk-adjusted returns net of costs, and on the need to build an operation that is agile and scalable, in anticipation of a resumption of Crown contributions in the 2020/21 year.
International Best Practice
In developing the model, we looked closely at international best practice, studying the operating models used by a number of similar funds overseas.
Key trends include:
- an increasing focus and discipline on whole-of-fund costs, leading to in-sourcing, co-investment and collaboration;
- greater concentration on direct investments; and
- less reliance on skill and more focus on identifying opportunities as key drivers of return.
Our Ideal Operating Model
We then considered these trends in light of our particular advantages and challenges as a New Zealand-based, sovereign fund with a long-term horizon. A focus of our work was to develop positions on
whether different types of investment and operational support activities should be managed in-house or outsourced. We also re-assessed where we should focus our investment search and selection in order to have the highest possible confidence of achieving our mandate of maximising returns without undue risk.
Our ideal operating model has:
- simpler investment processes which enhance our ability to consistently rank investment opportunities and prioritise our efforts;
- greater influence over the allocation of our capital to different investment risks;
- fewer, but deeper, external manager and advisor relationships, based on more of a partnership approach; and
- a more concentrated, active investment portfolio (as opportunities in which we have high confidence arise).
The work stressed the importance of ranking investment opportunities based on our level of confidence in them. It also found that there was a good business case for managing investment functions internally, when the activity is high net value-add and/or a key control function.