Cullen fund trucks on

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Messing with the investment psyche of the New Zealand Superannuation Fund by throwing money at risk-free assets such as cash or bonds will doom the fund to failure, warns its chief executive Adrian Orr.

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Messing with the investment psyche of the New Zealand Superannuation Fund by throwing money at risk-free assets such as cash or bonds will doom the fund to failure, warns its chief executive Adrian Orr.

Created five years ago by the Labour-led government as a means of offsetting the burden of paying universal superannuation to a generation of retiring baby boomers, the fund's recent performance has come in for heavy criticism after suffering huge paper losses.

Institutional collapses and plunging global markets have wiped $4.1 billion from the share- based fund's value in the past 18 months, winding the clock back more than two years on New Zealand's retirement nest egg.

Because of the state of global markets and mounting borrowing requirements facing the Crown, some critics are calling for the Government to cease, or suspend, its $2b-a-year contribution.

But Mr Orr is adamant that the fund must stick to its long-term investment focus if it is to meet the needs of New Zealanders when the Government starts withdrawing capital from 2020. "Forecasting short term is near impossible and leads to a lot of cost and lost opportunities," he said.

"Exactly when a boom or bust will happen, what will trigger it, how it will unfold, and what the investment implications might be cannot be forecast with useful precision - otherwise they would not happen.

"Likewise, putting money only into cash or fixed interest dooms the fund to failure from the outset. The future retirement income liabilities, which follow nominal wages, will outpace the returns. Hence the fund will not smooth future tax payments."

Three years of stellar returns - averaging 16 per cent (after fees but before tax) - were ended abruptly with a 5 per cent loss for the year ended June 2008, and the losses have continued to stack up with this year's returns down more than 25 per cent to date.

Yet the man at the helm is not fazed, citing plummeting asset prices as a great time to invest. In simple terms, people who bought a house now for 30 years would be far happier than those who did so two years ago, he says. "One of biggest challenges facing long-term investors when markets are down is that it's the most opportune time to be investing, but also the time when the book value of your portfolio is looking the most damaged.

"The big recession is already priced in - there are some enormous declines in expected earnings priced into assets. So we're investing, not in denial that there is a global recession going on, but because asset prices relative to their long-term values are looking exceptionally good at the moment."

Although the Government has yet to commit to a decision on the short-term future of the fund - Finance Minister Bill English has continued to deflect questions with answers such as, "It is an option" - talk has centred on a contribution holiday, reducing Crown payments or avoiding riskier asset classes.

This, says Mr Orr, defeats the object of the fund, and by reducing or stopping payments now the Government risks missing out on the full upside swing. "Right now, the earnings prospects for long-term investors have improved significantly. This is great for the super fund, with the majority of contributions ahead.

"The global recession has seen asset prices fall and the rewards for accepting investment risk rise to historical levels. History also teaches us that the best time for investment returns is after significant downward corrections."

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