Crown institution funds underperform
The Government would have been better off stashing $47.2 billion worth of actively managed investment funds into its own bonds over the last five years, a review of the funds shows.
The latest Crown Ownership Monitoring Unit report shows that Crown Financial Institutions (CFIs) funds have returned a collective 4.1 per cent per annum in the five years to June 2012.
The average yield of 10-year government bonds has been 5.4 per cent over the same period.
The five CFIs that make up the $47.2b portfolio are the New Zealand Superannuation Fund, Accident Compensation Corporation (ACC), Government Superannuation Fund (GSF), the Earthquake Commission, and the National Provident Fund (NPF).
The report found it "encouraging" that active investment strategies had added value to the portfolio compared to passive benchmarks - although not by much.
In 2011/12, the portfolio outperformed the benchmark by 0.6 per cent after fees and costs, which works out as an additional $270 million in returns.
Over the long term ACC is the only crown fund to meet its fund objective, while the GSF and NPF have failed to even match passive benchmark returns.
The NZ Super Fund released updated results for the year ended December 2012 yesterday, which show it is now achieving its long-term performance expectation with an annual return of 7.92 per cent.
Each of the CFIs determines its own investment strategy according to its objectives, and often outsources asset selection to external fund managers.
Fund management expenses in the 2011/12 year ran to $199.2m, or 0.42 per cent of the total money under management.
ACC, which has made extensive use of in-house investment management, was the most cost-efficient at just 0.28 per cent.
The report said the other CFIs, apart from the NZ Super Fund, lack the scale to make in-house fund management effective.
The government funds now invest such a huge amount that they are rapidly outgrowing the shallow local equity market, an issue explored in the 2012 report.
New Zealand stocks only make up 7.6 per cent of CFI funds, but the total value of funds has grown 23 per cent over the past 30 months, while the NZX's entire market capitalisation has increased by just 1 per cent.
"We do not regard the current level of aggregate CFI holdings in the NZX, or the total dollar exposures, as excessive," said Crown Ownership Monitoring Unit deputy secretary Andrew Turner.
"However, there is a limit to the scale of assets that can be invested in NZX listed companies."
As at June 30 2012, the CFI portfolio held a stake of more than 5 per cent in 47 NZX-listed companies.
The various CFIs had a combined stake of more than 10 per cent in 17 of those companies, including the likes of SkyCity, Auckland International Airport, and Restaurant Brands.
Investment profile: $47.2b of Government funds
- Listed Overseas Equities: 39 per cent
- NZ Bonds: 28 per cent
- Overseas Bonds: 8 per cent
- Listed NZ Equities: 7 per cent
- Infrastructure and Private Equity: 6 per cent
- Property: 4 per cent
- Cash: 4 per cent
- Other Growth Assets: 4 per cent