NZ Super Fund loses $880.75m

By DAVID HARGREAVES - BusinessDay.co.nz | Monday, 29 September 2008

The fund set up to help out with New Zealand's burgeoning pension bill has - as expected - lost money this year in the face of turbulent global markets.

The New Zealand Superannuation Fund, which has been operating since 2003, had an after-tax loss of $880.75 million for the year to June, compared with a $1.09 billion profit last year.

The result represented, pre-tax, a negative return of 4.92 per cent. The before-tax loss was $716.46 million.

The past year is being described by the managers of the fund as the type that might be seen once in every 15.

All over the world, large managed funds are seeing negative returns in the wake of a roller-coaster performance by stock markets.

It is the first time the so-called Cullen Fund, nicknamed after architect Michael Cullen, has lost money.

The NZ Super Fund has enjoyed a stellar start to life on the back of global markets that were incredibly buoyant - till the past year.

Even after this year's loss, the fund's rate of return since inception is some 3.49 per cent ahead of the so-called "risk free" rate of investment - as represented by government-backed securities.

The NZ Super Fund has around $2 billion of taxpayers' money pumped into it every year, with the intention of building a large sum that will ultimately assist with pension requirements.

By law the government can't draw on the fund till 2020. By 2025 it is estimated that the fund will be worth $109 billion.

In the latest year the fund grew to $14.13 billion from $13.13 billion, after the Crown contributed $2.1 billion.

David May, chairman of the fund's controlling entity, the Guardians of New Zealand Superannuation, said the fund had been affected in the short term by the turbulence in global stock markets.

"The negative impact comes despite our lack of any significant exposure to the subprime market, the finance company sector, or to the liquidity strains suffered by many financial institutions," he said.

"The fund deliberately invests in global equity markets because we expect that they will perform best over the long term. The fund's long-term horizon means it is well placed to withstand ups and downs in the market.

"The board remains confident that this remains the right approach and that the appropriate response to the credit crisis is to remain calm and ready to benefit from the more favourable risk and liquidity premiums in the years ahead."

Chief executive Adrian Orr said since the end of the financial year - in July and August - the fund had made a positive return of 0.23 per cent - "a small but positive number. However, the market has remained volatile through September".

Orr said the world was seeing a significant and rapid rearrangement of its financial system.

"These are dramatic and unsettling times. Even then, however, the aggregate impact on the fund, while not pleasant, is not outside the bounds of our long-term expectations to date. Investment opportunities for a long-term fund like ours are on the rise. We remain disciplined in our decision making," Orr said.

The fund had made "excellent progress" as an organisation during the past year, and has developed a strong institutional structure and team that will serve the fund well as it grows in size and complexity, he said.