Investment Performance
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TOTAL RETURN 2017/18
(AFTER COSTS AND BEFORE NZ TAX)

Arrow Up12.43%

FUND SIZE UP BY

$4.0B

THE YEAR IN SUMMARY

The Fund again out-performed global markets, returning 12.43% (after costs, before NZ tax) over 2017/18. The Guardians’ active investment activities added value of 2.02% (NZD0.7b) on top of a Reference Portfolio (market) return of 10.42%.

The Fund finished the year at NZD39.37b before New Zealand tax, an increase of NZD4.0b.

The overall Fund’s out-performance of the Reference Portfolio was due mainly to the success of its strategic tilting programme, a positive performance by its single largest investment, Kaingaroa Timberlands, and the active collateral mandate. See page 40 of the Annual Report for more details.

 

REFERENCE PORTFOLIO RETURNS

Around two-thirds of the Fund is invested passively, in line with the Reference Portfolio. Therefore, the composition of the Reference Portfolio is the biggest single influence on Fund returns. The table across shows how the components of the Reference Portfolio performed during the year. The returns are shown on a hedged to NZD basis.

 

PERFORMANCE SINCE INCEPTION

As detailed in the Chair’s Statement on page 14 of the Annual Report, the Fund is well ahead of its performance benchmarks since inception.

Reference Portfolio benchmark
Weight
2017/18 Return
Global Equities - developed markets 65% 13.03%
Global Equities - emerging markets 10% 9.05%
New Zealand Equities 5% 17.63%
Global Fixed Income 20% 2.20%
Total 100% 10.42%

PERFORMANCE SUMMARY

Fund performance as at 30 June 2017. Fund size: NZD35.37 billion before tax.

Fund Performance as at 30 June 2018
Fund Size NZD39.37b before tax
 
Since Inception
(Sept 2003)
Ten 
Years
Five 
Years
One
Year

Actual fund returns
(after costs, before NZ tax)

10.37% 10.47% 13.59% 12.43%

Reference Portfolio return
(after costs, before NZ tax)

8.88% 8.53% 11.37% 10.42%

Value-added (actual return less Reference Portfolio return)

1.49% 1.94% 2.22% 2.02%

Estimated $ earned relative to Reference Portfolio

$7,585m $6,660m $3,724m $703m
New Zealand income tax paid $6,424m $4,898m $3,380m  $862m
New Zealand Treasury Bill (T-Bill) Return  4.06% 2.79% 2.42% 1.72%
Net Return (Actual return - T-Bill return)  6.31% 7.68% 11.18% 10.71%
Estimated $ earned relative to T-Bills  $23,080m $21,327m $16,193m $3,743m
$ change in net asset position $39,369m $25,240m $16,398m $3,996m

 

VALUE-ADD IN 2017/18

In this section, we report on value added or detracted by our active investments, by risk basket, relative to our passive Reference Portfolio benchmark. In total, the Fund outperformed the Reference Portfolio by 2.02% (NZD703m) over the year. This compares with a 1.49% annual (NZD7.59b) outperformance since inception. We expect to outperform the Reference Portfolio by 1% per year, over the long-term, based on the level of risk we expect to take. It is important to appreciate that our active investment strategies are designed to maximise returns over the long-term. Negative returns as well as positive, and movements up and down between years, are expected.

Risk baskets
2017/18
2016/17
2015/16

ASSET SELECTION
e.g. opportunistic, buyout, active equities.

This basket contains opportunities that involve the skill to pick assets. These include internal and external mandates such as NZ and emerging market active equities, as well as one-off direct investments. This year our active equity portfolios in aggregate underperformed their benchmarks and a small number of our direct investments underwent modest negative revaluations. As an investor with known liquidity, we have the ability to support companies' growth over time with a view to maximising long-term returns.

-0.18%   -0.05%  0.20%

MARKET PRICING – ARBITRAGE, DISTRESSED CREDIT AND FUNDING
e.g. active collateral, merger arbitrage

These opportunities are mainly in the area of credit and funding and often draw on the Fund’s sovereign status and known liquidity. They tend to have lower risks than opportunities in the other two market pricing baskets, since interest rate risks are generally hedged and trades may be implemented via arbitrage strategies. Our active collateral, merger arbitrage and direct arbitrage strategies all added value this year.

0.46%   1.20%  0.20%

MARKET PRICING – BROAD MARKETS
e.g. global macro, strategic tilting

The opportunities in this basket draw on the Fund’s long-term horizon and ability to look through short-term market movements. This year, our strategic tilting programme and global macro investment in the Bridgewater Pure Alpha II Fund both added value. Strategic tilting, a mandate that is run by our in-house team, systematically takes on risk after markets have fallen and takes risk off again where markets are expensive. The tilting programme, which began in 2009, has been a strong source of value-add for the Fund; a white paper on it is available on our website.

1.22%   2.27%  -0.53%

MARKET PRICING – REAL ASSETS
e.g. alternative energy, expansion capital, infrastructure, real estate

These opportunities are mainly driven by our views on the pricing of real assets in their respective markets. Our infrastructure and real estate investments increased in value (but not relative to their benchmarks). Our alternative energy/expansion capital investments experienced mixed results. These assets are considered long-term investments, are largely at an early stage and are not expected to generate strong returns until they are more mature. Their performance will also tend to lag equity markets, which was the case this year with their benchmark performing well off the back of rising global equity markets.

-0.52%   -0.20%  0.91%

STRUCTURAL
e.g. emerging markets equity up-weight, insurance-related securities, timber

This basket includes diversifying assets, not represented in the Reference Portfolio, such as timber, life settlements and catastrophe bonds. The basket also includes opportunities that we intend to maintain an allocation to based on our favourable views on the medium to longer-term opportunity drivers (e.g. an overweight to emerging market equities). The vast majority of the value added by this basket during the year can be attributed to cash returns and a revaluation of our Kaingaroa Timberlands forestry investment, driven by stronger log prices.

0.62%   1.05%  0.10%
TOTAL  1.60%  4.27%  0.88%

 

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