Investment Insights -
NZ Funds’ investment philosophy
In this Investment Insight, we take the opportunity to discuss NZ Funds’ investment philosophy. A philosophy, backed up by a sound investment process, can act as a compass for investment decision-making during extraordinary market conditions, like the one we faced earlier this year.
The investment philosophy which underlies NZ Funds is for each of our clients to hold a globally diversified portfolio with downside mitigation. Using specialist investment managers and our in-house active management approach, we seek to maintain a balance between preserving capital and growing wealth.
Active investment management
We take an active approach to managing clients’ portfolios. Our approach enables us to better meet the objectives of each Portfolio and to take advantage of investment opportunities as they arise. In times of volatility, active management guides clients’ portfolios through cycles, especially during inflection points in the economic cycle.
Asset allocation
As part of our active management approach, our asset allocation is dynamic (able to change over time) rather than strategic (a fixed allocation). NZ Funds’ investment team selects each Portfolio’s asset allocation at any time, based on our investment knowledge and research, with reference to each Portfolio’s investment objective and risk profile.
The NZ Funds KiwiSaver Scheme has one of the most sophisticated lifecycle asset allocation approaches available within KiwiSaver in New Zealand. MyFiduciary’s analysis of lifecycle products, August 2019 concluded that “In our view, the NZ Funds glidepath is well designed and is one of the best in the New Zealand market. Compared with other glidepaths in New Zealand, NZ Funds’ approach is more likely to achieve the retirement objectives of most investors."
Wide mandates
All NZ Funds’ Portfolios have wide investment mandates. This means that while there may be long-term target asset allocations for each Portfolio, we are able to take a variety of actions that include, but are not limited to:
Specialist investment managers (including hedge funds) are selected where NZ Funds considers that the manager’s investment approach will help meet clients’ objectives. These specialist investment managers are intended to complement NZ Funds’ own investment skills and can provide clients with access to diverse investment approaches.
In seeking to mitigate the downside, we invest with specialist investment managers that have the potential to profit from asset price declines. We may also actively reduce a Portfolio’s exposure to an asset class, or hedge an exposure, by investing additional funds in an asset class with the potential to offset returns.
Foreign currency
NZ Funds actively manages the foreign currency exposure of clients’ portfolios. Where a Portfolio holds assets denominated in a foreign currency, NZ Funds has the choice of whether to hedge back to the New Zealand dollar or retain a foreign currency exposure.
Social responsibility
NZ Funds explicitly includes environmental, social and governance (ESG) factors into traditional financial analysis and investment decision-making. We accept that ESG factors represent a core driver of both value and risk in companies and assets. NZ Funds employs ISS, the world’s leading provider of corporate governance and responsible investment solutions, to assist NZ Funds in the implementation of our responsible investment policy.
Whether financial markets are moving through different economic cycles or if they experience a sudden shock, such as COVID-19, NZ Funds’ investment philosophy of preserving capital and growing wealth remains. We believe the combination of this investment philosophy together with financial advice from a financial adviser materially improves the wealth accumulation outcomes of our clients.
The investment philosophy which underlies NZ Funds is for each of our clients to hold a globally diversified portfolio with downside mitigation. Using specialist investment managers and our in-house active management approach, we seek to maintain a balance between preserving capital and growing wealth.
Active investment management
We take an active approach to managing clients’ portfolios. Our approach enables us to better meet the objectives of each Portfolio and to take advantage of investment opportunities as they arise. In times of volatility, active management guides clients’ portfolios through cycles, especially during inflection points in the economic cycle.
Asset allocation
As part of our active management approach, our asset allocation is dynamic (able to change over time) rather than strategic (a fixed allocation). NZ Funds’ investment team selects each Portfolio’s asset allocation at any time, based on our investment knowledge and research, with reference to each Portfolio’s investment objective and risk profile.
The NZ Funds KiwiSaver Scheme has one of the most sophisticated lifecycle asset allocation approaches available within KiwiSaver in New Zealand. MyFiduciary’s analysis of lifecycle products, August 2019 concluded that “In our view, the NZ Funds glidepath is well designed and is one of the best in the New Zealand market. Compared with other glidepaths in New Zealand, NZ Funds’ approach is more likely to achieve the retirement objectives of most investors."
Wide mandates
All NZ Funds’ Portfolios have wide investment mandates. This means that while there may be long-term target asset allocations for each Portfolio, we are able to take a variety of actions that include, but are not limited to:
- altering the proportion invested in each share, bond or asset class;
- using specialist investment managers (including hedge funds);
- taking foreign currency positions;
- applying hedging; and
- taking short positions.
Specialist investment managers (including hedge funds) are selected where NZ Funds considers that the manager’s investment approach will help meet clients’ objectives. These specialist investment managers are intended to complement NZ Funds’ own investment skills and can provide clients with access to diverse investment approaches.
In seeking to mitigate the downside, we invest with specialist investment managers that have the potential to profit from asset price declines. We may also actively reduce a Portfolio’s exposure to an asset class, or hedge an exposure, by investing additional funds in an asset class with the potential to offset returns.
Foreign currency
NZ Funds actively manages the foreign currency exposure of clients’ portfolios. Where a Portfolio holds assets denominated in a foreign currency, NZ Funds has the choice of whether to hedge back to the New Zealand dollar or retain a foreign currency exposure.
Social responsibility
NZ Funds explicitly includes environmental, social and governance (ESG) factors into traditional financial analysis and investment decision-making. We accept that ESG factors represent a core driver of both value and risk in companies and assets. NZ Funds employs ISS, the world’s leading provider of corporate governance and responsible investment solutions, to assist NZ Funds in the implementation of our responsible investment policy.
Whether financial markets are moving through different economic cycles or if they experience a sudden shock, such as COVID-19, NZ Funds’ investment philosophy of preserving capital and growing wealth remains. We believe the combination of this investment philosophy together with financial advice from a financial adviser materially improves the wealth accumulation outcomes of our clients.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
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James Grigor is Chief Investment Officer for New Zealand Funds Management Limited (NZ Funds) and a member of the NZ Funds KiwiSaver Scheme. James' comments are of a general nature, and he is not responsible for any loss that any reader may suffer from following it.
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