Imagine that you live in a nation where the population is aging. It is perfectly obvious to anyone with a pulse that at some point in the not-too-distant future, working-age citizens will begin to bear an impossible burden trying to support retirement payments to non-working citizens. Taxes will have to skyrocket, productivity will collapse and your nation will sink like a stone to the bottom of the nearest sea.
If you happen to live in the U.S., Western Europe or Japan, what you will do about this is precisely nothing. That’s because every politician in those places promises more and more of everything and, no matter how fatuously stupid it is, we all vote for them.
But if, by some stroke of luck, you happen to live in New Zealand, it’s a whole other chilly bin. You engage in a long and sensible public and legislative debate about the problem and you decide that you need to start paying now so that your country won’t sink to the bottom of the sea then.
Taxes are raised by a modest amount — more on the rich, less on the middle class, not at all on the poor — and those taxes, instead of being spent on the usual frivolous nonsense, are placed into the hands of the New Zealand Superannuation Fund — better known, both because it’s easier to pronounce and because of its great performance, as the NZ Super Fund.
It’s not perfect — New Zealand is, after all, part of the real world. For example, following the Global Financial Crisis payments into the Super Fund were suspended and they didn’t resume until December 2017. But that’s quibble.
Because the Kiwis started early, before the problem became irresolvable, no withdrawals will need to be made from the Super Fund until about the mid-2030s. And even then the Fund will continue to grow until it peaks in size in about 2070.
With these attributes, the NZ Super Fund is obviously a long-term, growth-oriented investor. But notice that, unless you are 90 years old and have no heirs, you are also a long-term, growth-oriented investor. True, you are likely to be taking money out of your portfolio before the mid-2030s, and you also pay tax on the income and gains in the portfolio.
Nonetheless, we individual investors are similar enough to the NZ Super Fund that we might profit by observing how they invest, why they invest the way they do, and what results they have achieved.
Let’s start with that last metric: how has the NZ Super Fund performed? The answer is that they have performed pretty damned well.
Over the past 10 years the Super Fund compounded annually at 14%. How good is that? Yale, under the guidance of the brilliant David Swensen, and the best-performing large endowment in America, compounded over the last 10 years at 11%.
It hasn’t been all sweetness and light, of course — when you put your money at risk, you will inevitably experience some painful years. After peaking in late 2007, for example, the Super Fund (which operates on July 1 to June 30 fiscal year) declined 5 percent in 2007-08, then declined an additional 18 percent in 2008-09. 2011-12 wasn’t all that great, either, with the Fund turning in slightly negative performance.
Still, with long-term numbers at 14 percent per annum, the NZ Super Fund is obviously doing something right. What can we learn from their experience? For starters, let’s look at some things about the Super Fund that don’t particularly drive its performance:
Having a long investment time horizon. Yes, the Super Fund has a long time horizon, but so do most individual investors. As we’ll see, what matters isn’t having a long time horizon but acting like a long-term investor.
Having no near-term spending needs. Many, perhaps most, individual investors need to withdraw funds from their investment portfolios for spending needs, while the Super Fund won’t have to do that for a decade or so. But as we’ll see, the Super Fund actually invests as though it had current spending needs, maintaining a surprisingly high allocation to bonds.
Having long investment experience. Most of the senior employees of the Super Fund have worked in the investment world for many years. But at the Super Fund nobody is buying and selling stocks and bonds, nobody is shorting companies, nobody is gobbling up undervalued credits or distressed properties — all that is outsourced to index fund managers or active managers. The Super Fund manages portfolios, which is a very different thing, and which is, in fact, what we all do.
Having a big fee budget. The Super Fund is your basic tightwad investor. Much of the Fund is invested through passive, indexed products at extremely low cost. The Fund does seek to negotiate lower fees with managers, using its huge buying power. But the reality is that the best managers don’t have to work for peanuts and don’t need more assets.
Getting privileged access to the best deals. Some of this happens at the Super Fund, but remember that they are a bit like Warren Buffett: with $40 billion in assets they have to be elephant hunters. A 5 percent position at the Fund would be around $2 billion. Most of the great deals in the world are much too small for the Super Fund, with the result that, while they do see some good deals, they probably miss more than they see.
Now that we know how the Super Fund didn’t produce its terrific results, we’ll take a look next week at how they did produce them.