New Zealand’s sovereign wealth fund is cutting equity holdings after this year’s surge in global stock markets left shares at the most expensive in four years.
“Sometimes we are going to have huge opportunities and that’s when we use our risk,” Neil Williams, chief investment adviser at the New Zealand Superannuation Fund, said in an interview in Auckland Dec. 2. “Other times, like now, equities have rallied and are close to fair value. Fixed income sold off and bond yields are getting closer to fair value. Then we leave it and we don’t have positions on.”
The MSCI World Index of developed market stocks surged 20 percent this year amid optimism the Federal Reserve would maintain its unprecedented stimulus into 2014 as the world’s largest economy recovers. The rally put the gauge on course for the best performance since 2009 and drove valuations at the end of November to 15.9 times estimated earnings, the highest in four years, data compiled by Bloomberg show.
Williams oversees asset allocation at the NZ$23 billion ($18.8 billion) fund, using an investment philosophy called strategic tilting, which shifts the absolute risk of the portfolio. He remains “modestly overweight” global equities and is more heavily invested in credit markets than the benchmarks the fund tracks, while holding less assets in fixed income and the New Zealand dollar, he said.
Strategic tilting involves making shifts toward or away from asset classes when Williams believes the market has substantially over-reacted compared with his assessment of value.
The New Zealand pension fund, led by chief executive officer Adrian Orr, had 61 percent invested in global equities and 5 percent in local stocks at the end of June, according to its annual report. Fixed income comprised 9 percent of the fund, infrastructure 6 percent, timber 6 percent and private equity 3 percent. Three percent was in other private markets, 6 percent in property and 1 percent in rural farmland, the report showed. Williams declined to comment on detailed updates to these figures.
“The amount of risk that we are running in strategic tilting today is actually quite low compared to a year ago,” said Williams. “Given that we’re a value-based, very long-term investor, as equity markets have rallied, the attractiveness of our return signals has gone down,” he said.
Williams, a former London-based chief global strategist at Goldman Sachs Group Inc. and head of global asset allocation at UBS AG’s fund management unit, manages the New Zealand pension fund’s investments with Alex Bacchus and Sam Porath. Williams hired the two because of their contrasting backgrounds to him, he said.
Bacchus, an engineer who also has a degree in financial mathematics, worked on a credit derivatives trading desk in London. Porath, enrolled for a PhD in maths and a science graduate, has worked for Russell Investment Group as a consultant and has advised Australian equity funds on investment decisions.
The New Zealand fund has returned 8.8 percent a year since it began in 2003 with NZ$2.4 billion in cash. The fund-management team bets on equities by buying index futures contracts. All investments are synthetic, meaning they don’t own the underlying security.
“I can’t time the markets,” said Williams. “I’ve proved that to myself over many years and I don’t think many people can. Our macro economic forecasts don’t have any outlandish views. We use very consensus estimates, no one would raise their eyebrows at them.”