Impact of COVID-19 market volatility on NZ Super FundPosted On: Friday, 20 March 2020
In line with global market movements, the Net Asset Value of the NZ Super Fund has declined to $37.78 billion (as of close 17 March) from $46.68b as at 31 December 2019 – a reduction of $8.90bn or 19.5 percent (unaudited, before NZ tax, after costs). The Fund’s long term performance since inception sits at 8.75 percent per annum, versus 7.39 percent for its passive index Reference Portfolio and 3.78 percent for Treasury Bills.
“As a long-term investor with no substantial withdrawals until the 2050s the Fund is well-placed to withstand market downturns and our investment strategy is designed with this in mind. The Super Fund has the ability to ride out and potentially benefit from short-term market movements. We use several active, contrarian investment strategies, meaning we’re buying when other investors are selling and vice-versa, in order to further enhance returns over that long time horizon,” says NZ Super Fund CEO Matt Whineray.
“The key with our portfolio to ensure we have the discipline, liquidity, governance and resources to hold our course through the volatility and ensure the Fund is well positioned to benefit from the eventual market recovery, as was our experience in the GFC.”
Mr Whineray says that in a repeat of the GFC, from peak to trough (a ten-month period), it is estimated the Fund would lose $25b (-52.6 percent) from its ~$47bn peak in mid-February.
“We believe equity markets eventually recover to higher fair values following periods of crisis. As a result, the Super Fund expects it will earn back losses suffered by our active strategies in subsequent years as markets recover. In the GFC scenario, the Fund would recover its initial value, and catch-up lost ground, within 20 months, as long as it can “hold the course” with its investment strategies through a market cycle.
“We take on the risk associated with growth assets to generate higher long term returns, in order to fulfil our mission of smoothing the future cost increases of providing universal superannuation. It is to be expected that a growth-oriented portfolio such as ours will fall when markets experience sharp drops in value.
“The major risk to the Fund is that we close down our investment positions and lock in losses experienced in the current crisis. This would significantly impair the ability of the Fund to fulfil its long-term purpose,” says Mr Whineray.
The current market environment is the most volatile since the GFC in 2008, with even steeper share market declines. The MSCI World (market cap weighted global stock market index of 1,644 stocks from 23 developed markets) has sold off more than 25 percent so far this calendar year, with S&P500 dropping about 22 percent for the same period.
“We are also taking a number of precautions in order to support our team and ensure we sustain our ability to manage the Fund effectively over the coming weeks and months,” says Mr Whineray.
From today, staff will predominantly be working from home until further notice in order to support efforts to slow the spread of Covid-19 and protect staff at the Super Fund.
Mr Whineray says he has a high level of confidence in the Fund’s ability to operate prudently through this period of extraordinary circumstances. He says it is in the fortunate position of having excellent technology solutions to optimise business continuity – with trading, monitoring, work flow, communication and IT systems are cloud-based and able to accessed remotely.
Super Fund staff ceased all international travel earlier this month and are only undertaking essential domestic travel.