Mr. Hyde credited the Auckland-based NZ$56.2 billion ($36 billion) sovereign wealth fund’s far-ranging strategic tilting overlay program with effectively minimizing pressure on New Zealand’s investment team to tweak the underlying portfolio in response to the latest market volatility.
“Like everybody else, we’ve been impacted by falling equity markets and bond markets as well … but that’s something that we expect,” Mr. Hyde said. “There’ll be periods when they’re up strongly, as they have been over the last decade, and there’ll be times when they come off quite sharply. That’s part of the territory,” he said.
“Our portfolio has been negatively impacted by developments over the past five or six months,” he conceded.
That said, the fund’s active portfolio — including meaningful allocations to global macro strategies and large allocations to equity factor strategies, and value in particular — “has performed very, very well over that period,” helping to limit those losses, he said.
The single biggest allocation in New Zealand Super’s active portfolio is the positions “that we’re taking in strategic tilting — the value-driven, systematic program which consumes the largest amount of our active risk budget,” Mr. Hyde said.
The strategic tilting team buys country-level indexes for equity markets, sovereign bond markets, currencies, real estate, credit and commodities when prices fall below its estimates of fair value. It shorts indexes when valuations exceed those fair value estimates.
Coming into this year’s sell-off of equities and sovereign bonds, “we’ve been universally short in bond markets” but both long and short equity markets, with U.S. stocks standing out as trading at expensive valuations, Mr. Hyde said.”As bond markets have sold off, we’ve reduced our position sizes in our bonds and taken profits along the way,” he said. “For equities, we’ve reduced some short positions in some countries; in other countries we’ve increased our existing long positions because we thought that they were actually cheap,” he said. On balance, the strategic tilting program has taken on more risk in recent months, Mr. Hyde said.