SWFI interviews the CIO and soon-to-be interim-head of NZ Super on how to pick the right managers, the importance of investment beliefs in times of volatility, and what to expect from the One Planet Working Group.
Matt Whineray has a lot on his plate these days. On top of his duties as chief investment officer at the New Zealand Superannuation Fund, Matt will soon be taking the helm as its interim head following the departure of current chief executive Adrian Orr in mid-March. But with a career in investment banking and nearly 10 years at the Fund under his belt, the 48-year-old New Zealander is more than capable of leading during the transition.
A lawyer by training who came to NZ Super in the midst of the Global Financial Crisis, Matt has been instrumental to the fund’s growth and evolution in the decade since, building out a robust, in-house process for evaluating asset allocation and manager selection that has helped keep the fund nimble, self-sufficient, and one of the strongest performing sovereign wealth funds in the world.
In this brief interview with Spencer Ward, research associate and writer here at the Sovereign Wealth Fund Institute (SWFI), Matt reflects on building close partnerships with managers, what the Fund has done in the past to deal with the inevitable adversity of the future, and the role of the One Planet Sovereign Wealth Fund Working group in fostering a dialogue around responsible investment at the board-level.
SPENCER WARD: Why don’t we start off by telling me a little bit about yourself and how you got started at NZ Super?
MATT WHINERAY: Well I did law and commerce at university, and became a lawyer straight after that. I was keen to go work in New York at the time, but I had a mate who was doing investment banking for Credit Suisse, so I switched over and worked for them down in New Zealand for a little and got up to New York in the late 90s. I had three years in New York and then came back to New Zealand, still in investment banking and then went up to Hong Kong, still with Credit Suisse.
In 2008 got a call about a role at NZ Super looking at the private markets, and that sounded like a great opportunity. But we also had two young kids at that stage who were two and three years old, so the idea of coming back to New Zealand with them was quite popular [laughs]. So I’ve been here coming up 10 years. I started in May of 2008, so in three months I’ll have been here 10 years.
WARD: Congratulations are in order then! Can you tell me a little about how NZ Super changed over the years? And this can be in terms of culture, the size of the team, investment climate, and what have you.
WHINERAY: We’re about 130 people now, roughly, and it was probably about 40 when I started. So it’s changed in terms of scale quite significantly and in terms of what we do ourselves quite a lot. When I first got here, we were very traditionally outsourced with external managers doing pretty much everything for us.
When the Global Financial Crisis began to kick off in 2008 and 2009, we had to rush to try and figure out what was in our portfolios through managers, tried to see if we had the liquidity we needed. Since that time we have been growing our capabilities internally a lot. We started with a treasury function that manages our own derivatives, cash, and collateral pools, before building out some of our own direct investment capabilities.
So we’ve really grown quite a lot as an institution and adapted our strategy where we can along the way. We do a reasonable amount of work in-house, not everything ourselves. We’re geographically blessed in some ways to be in New Zealand, but also somewhat at a disadvantage in terms of where the major investment markets are, so we’ll always have a need for some external managers. But I guess what we’ve been trying to do is figure out where we should be running stuff ourselves, and where we should be relying on managers to do that for us.
WARD: I see, so taking a more hands-on role when and where you can. Now, it’s been a very strong past few years at NZ Super – 2017 was one of your best performances ever with a pre-tax return of 20.7% – so what’s the game plan moving forward to carry on that success?
WHINERAY: Good question. In terms of what was driving last year, markets played a big part of that. Now, we used to use a strategic asset allocation model, and in 2010 we switched to what we call a reference portfolio, and that’s our benchmark that’s a notional portfolio which is our Board’s key risk decision. If we don’t do anything else, if we don’t do any active management, then the reference portfolio is what we have.
So it’s a portfolio construction tool as well as a benchmarking tool. Last year, markets were obviously very strong. The reference portfolio returned 16.3% for the June 2017 year, and that’s basically because of strong equity markets in both developed and emerging markets. Fixed income was a very small contributor.
On top of that was the value that we added. Last year the value-add was 4.3%, and that’s a big number for us because in fact our total return and value-add were both the third-highest since we started investing in 2003. We would expect that, over time, over the long-term, the reference portfolio will return 7.7% per year, and that our active investments can add about 1% per year. So you can see that 16.3% versus 7.7%, due to strong markets, and 4.3% versus 1% is quite a good year for our active investments as well.
So we try and control what we can control, which is the value-add, and the markets will do what the markets will do. So as far as what we see moving forward, that depends quite a bit on what equity markets do and how well we can do on our own value-add. We had a good year last year, and we’ll certainly bank that, but of course that makes it tough going forward because equity valuations are higher, and it’s harder to continue to generate those returns above expectations.
WARD: Well you take opportunities where you can find them, then?
WHINERAY: Yea, that’s right. I would say we’re using less active risk. To us, active risk just means the difference between our reference portfolio and our actual portfolio, what we actually own, and we measure that difference and call that active risk. If we see a lot of opportunities, we’ll see more active risk, more difference between the reference portfolio and our actual portfolio.
At the moment, we don’t see a lot of opportunities, and as a result our active risk is about as small as it’s been since we moved to the reference portfolio model. What that means is we look at global markets and think, “Well, there’s less interesting stuff to pursue,” and as a result we’ll tend to own more of the reference portfolio, and not do as much on the opportunistic side.
WARD: Now in that same vein, in terms of moving away from external managers where you can, you talked in your most recent “How We Invest” whitepaper about your desire to have closer relationships with your external managers. So I was curious, when you’re looking at external managers, and hashing out those mandates, and working on fee-structures – which is obviously a big component of the relationship – what do you look for in external managers that are good indicators that you’ll have a good relationship with them?
WHINERAY: I guess at it’s real core, trust and alignment are really the key for us. We break those down into a bunch of different factors that we use, and we’ve published a whitepaper in the past on manager selection and monitoring and also about how our conviction process works. Perhaps we could pick a better name, conviction sounds vaguely criminal [laughs].
What I mean though is how much conviction we have in managers and how we get to that conviction. In those papers we outline the eight factors we use when we evaluate managers, but what it really boils down to is do we trust the managers, do we align with the managers, and do we believe they have the capability to execute against the opportunity that we’re looking for.
We started a few years ago on this conflict of having fewer, deeper relationships, and certainly that’s what we’ve been focused on the past few years, having not quite as many managers working for us. More risk and more dollars with each manager makes us more important to that manager, but it also makes it easier to allocate the right resources to monitoring that manager and making sure we’re getting the right exposures that we want.
We’ve been reasonably clear with managers about what we’re looking for, and we want to have long-lasting relationships that are flexible, where we can allocate more risk to a manager where the right opportunities are there, and allocate less risk to a manager if opportunities are not so good. So that’s what drives us in that approach.
WARD: Now in terms of picking external managers, do you tend to look mostly in your own-backyard in the Asia-Pacific region? Or would you say you go more international in scope to cover the field?
WHINERAY: I would say we’ve got about a handful of managers locally that do some public equities for us, as well as private equity and farmland management. But the majority of our managers are offshore, and that really reflects the fact that we’re a small country, so you would expect that the majority of investment opportunities aren’t going to be found here in New Zealand.
So there are a bunch of opportunities out there in the world that we can’t access from here directly, and that we need managers to help us get exposure to. As a result we’ve got more managers internationally than we have domestically by quite a big margin.
WARD: And does that factor as well into your long-term goal for 2018, which was mentioned in your annual report, of driving capital to New Zealand and streamlining the process for foreign investors?
WHINERAY: That’s a little bit of partnering. One of the things for us on the direct side is our legislation restricts us from controlling any domestic entities. So if we want to do a direct investment, we need a partner. At its highest, that might be a 50:50 split, where we own half, and some other investor owns half.
We work with a number of peer funds internationally who have a similar approach to us, and it’s all about teaming up with them to access different opportunities, whether it’s here or offshore. Obviously, we’ve got better access to the ones in New Zealand and we can introduce them to those, and vice-versa internationally we’d like to be able to rely on those investors to bring us along as partners where they have more local expertise.
WARD: Those kinds of partnerships sound like they are really going to be crucial moving forward as sovereign funds become more prominent players in the global investment community. Now, let’s shift back for a second to what you called your conviction process. You talk quite a bit about investment beliefs at NZ Super, about how they’re formed and implemented effectively into a cohesive strategy, and – perhaps most importantly – about how to reevaluate those beliefs during times of market stress and dynamism. How do you expect your investment beliefs to be challenged over the next several years?
WHINERAY: We’ve been through this process before back in 2009, and the beliefs are really important as an expression of our view of how markets work and what we need to develop and execute our investment strategies. They’re also really useful when you get into a period of poor performance because you can sit down and have a discussion with your board and your investment team and ask ourselves, “Have these changed? Do we no longer think that investors with a long horizon can outperform investors with a short horizon? Do we no longer think that asset class returns are at least partly predictable and revert to the mean?”
So you have a framework for dealing with unpredictability, because what happens when you start getting bad returns is you can get pulled into this hysteria like in 2009 – which I believe was our worst year at -22% – you get a lot of people saying, “Oh, well you should have had it all in bonds,” or, “There’s no reward for risk,” and on and on and on.
So the beliefs are very helpful for structuring that conversation, because when you boil it down there’s three components you have to ask yourself. First, do your beliefs still hold? Are the markets still operating efficiently? Next you have to ask, if your beliefs about the market do still hold, does your strategy align with those beliefs? And you might find that your strategy isn’t particularly useful anymore and you can identify where some of your underperformance is coming from.
Or, if your strategy is sound, you have to ask yourself, well, do we have the capabilities – either through ourselves or our external managers – to properly execute your strategy? So that framework is quite useful for breaking down the generic slings and arrows that you get which generally say, “Your returns are really bad, so you obviously are a bunch of idiots.” So you can go back and say, “Ok, what are we concerned about? Are we concerned about our beliefs? Are we concerned about our strategy? Or are we concerned about our capabilities?”
Those questions really helps put some borders around the conversation with your board in particular to ask, “Well, should we hold onto these positions?” That helped get us through the Global Financial Crisis as we continued to rebalance because we continued to buy equities as equities were falling, and I think that ultimately paid off down the road, but it was a pretty painful process along the way. We’d buy equities one day, and then the next day they’d go down. We’d buy equities again, and again the next day they’d go down.
At some point in 2009 they started to go back up again, so that discipline was rewarded. But having that framework to reassess yourself in place is incredibly useful. It’s also useful to have some experience in an organization that’s seen this before and is not going to immediately run screaming for the exits.
WARD: It’s quite a clever safety valve of sorts for setting aside some of the emotional aspects of the ups-and-downs of long-term investment, gives you a discipline you can fall back on.
WHINERAY: I would expect we’ll have some of our beliefs challenged over the coming years, not withstanding that we’ve had very little volatility in the last little while. Obviously, we’re getting a bit now though! The periods of calm we’ve been having is certainly not the norm, so our expectation is that things will get more volatile, and we’ll need those beliefs when that time comes, as it always eventually does.
WARD: Now let’s take a step back, looking at sovereign wealth funds and public pensions and their growing role in the global investment community. This past December you helped establish the One Planet Sovereign Wealth Fund Working Group alongside some of your peers at this year’s investor-focused climate summit in Paris. What do you think is the best way forward for sovereign funds who are struggling to integrate financial risks related to climate change when considering long-term projects, and what can kind of ESG recommendations do you think we can expect from the Working Group when it publishes its findings later this year?
WHINERAY: Well the idea was to come up with a framework for how to address climate change issues, particularly in the context of ESG considerations. And that includes methods and indicators that can help investors quantify and deal with risk related to climate change, because it’s not an easy thing to get your arms round in terms of where to start.
It depends a lot on your investment beliefs as well, so some investors might respond to those issues in a lot of different ways. Anne-Maree O’Connor, our Head of Responsible Investment at NZ Super, is quite involved with the Working Group at the moment, and I think a lot of the recommendations to investors will revolve around creating a framework for having a conversation about climate change-related risk, primarily with their boards, but also their investment teams.
In terms of the best way forward, the most critical component is that the board and the senior investment committees are aligned and have the same agenda, because if you delegate it to one part of the investment team, you’re not going to treat it as the whole portfolio issue that it is, because this really is a problem that requires real commitment and ownership at the board level.
WARD: In terms of the general attitude of long-term investors towards sustainable investment, do you think that investments which promote the transition to a low-carbon environment has been accepted by the broader community as more than just a feel-good initiative for the health of the planet, that it also just makes better business sense over the long run? Or is there still quite a bit of resistance on one, or both of those fronts?
WHINERAY: I think that people have responded in a lot of different ways. We published our climate change risk strategy last year, and for us this is really more of an investment risk question. At the moment, it’s not an ethical question, it’s not, “How should we be investing to make the planet a better place?” It’s more of, “What risk do we run in our portfolio as a result of climate change and all the consequences and impacts it might have?” We might get to the point soon where it’s an ethical question, and some investors have already made that decision on an ethical basis.
But we were quite clear that this is an investment risk practice. We think there is a risk that the markets don’t deal with climate change very well. We believe that markets are, in most cases, quite efficient, but we think on this issue they’re not pricing the risk of climate change very well. That’s partly a horizon issue, in that many investors have shorter horizons than they think climate change will manifest itself over, so they don’t believe they have to take it into account. I think it’s really developing quite a bit of momentum, however, across investors.
The place we typically start is on the risk side of things, and then you get to the opportunities side, where you ask, “What are the opportunities that arise from an investment perspective out of climate change, and how can investors take advantage of them?” But I think that before you dive into that, you make that decision about whether this is an ethical question for you or not, and if it is, then maybe you go and knock out your carbon-heavy exposures.
If it’s not, then you’ve got to have a discussion about whether you think it’s an investment risk that’s not properly priced, and that’s a more difficult question. But we worked our way through that and came up with investment strategies that reduce the risk for ourselves and our portfolio from what we see as the impacts of climate change.
WARD: NZ Super has been a leader in the field of sovereign wealth management and best practices for some time now, and helped in the creation of the Santiago Principles in 2009, but a lot has changed since then. As the size, number, and capacity of sovereign wealth funds grows, we’re starting to see them be more active and visible on the world stage, not just as responsible managers of capital, but in some cases as tools of foreign policy and development. What kind of role do you envision them as having in the global investment community and the world at large moving forward?
WHINERAY: Well I think the sovereign wealth funds – and it’s important I think to distinguish them a bit from sovereign development funds – as managers of capital and custodians of a country’s assets tend to have long-term views that should be more conducive to adopting a broader range of strategies. I think the important point about the Santiago Principles is that they were really about taking a look at how those founds ought to behave so that they’re not seen to be tools of foreign policy, so that’s why it’s probably important to distinguish between sovereign wealth funds and sovereign development funds.
We’ve been quite active in the International Forum of Sovereign Wealth Funds (IFSWF) – Adrian Orr, our CEO, is serving as chairman at the moment – and have been using that to try and drive some leadership from sovereign wealth funds on both how they invest along with ESG considerations. We had a big discussion at the Auckland 2016 conference around climate change and how to deal with the risks associated with that.
The other big thing we’ve been focusing on is how we can all leverage off each other. We utilize the three C’s on that front, so the first is comparison, or how sovereign wealth funds can share best practices and experiences around what strategies they use, or even just comparing costs and expenses, and that’s at the most basic level. The second C is collaboration, thinking about the Principles for Responsible Investment and the Santiago Principles, and joining up to engage with different companies around their business practices and disclosures. And the third C is co-investment, and that’s where you can really actually go out and check out opportunities for new investments that are going to improve the value for sovereign wealth funds more broadly.
Those three C’s are what we’ve been focusing on over the past couple years, and we think that sovereign wealth funds have a lot of ability to lead the way in terms of global investment because they have more degrees of freedom than funds that are managing liabilities and working on shorter time frames.
SWFI’s Chat with the Chief interview series aims to present the investment perspectives and experiences of some of the foremost C-level practitioners in the sovereign wealth fund and public pension community. This interview was conducted on February 12, 2018 via phone. It has been edited only slightly, for clarity.
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