WEBVTT - 14% return on $100b fund!!! How do they do it? - Thu 17 Sep

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<v Speaker 1>Good news this morning. There is a massive pension fund

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<v Speaker 1>that we all own. And guess what the balance is

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<v Speaker 1>about to hit? $ 100 billion. Yeah, almost $ 100 billion. And

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<v Speaker 1>it is worth a celebration this morning. For the year

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<v Speaker 1>to June, the New Zealand Super Fund, also known as

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<v Speaker 1>the Cullen Fund, it was started by Sir Michael Cullen,

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<v Speaker 1>hit $ 94.

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<v Speaker 2>4 billion.

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<v Speaker 1>That's an increase of almost $ 10 billion in the year

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<v Speaker 1>to June. Now, the return on investment was up over 14%

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<v Speaker 1>for that year. which has taken us a long way

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<v Speaker 1>from the very start back in the early 2000s to

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<v Speaker 1>where we are now. Joining me live this morning is

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<v Speaker 1>Will Goodwin, the guy in charge of that return. Joining

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<v Speaker 1>us from the New Zealand Superfund. Nice to have you

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<v Speaker 1>on the show, Will. Good morning.

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<v Speaker 2>Kia ora, Ryan. Good morning.

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<v Speaker 1>Good to have you here. So that's pretty healthy. Pre-tax 14.2%.

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<v Speaker 1>Is it US equities? Does a rising tide lift all boats?

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<v Speaker 2>Yeah, it does a little bit. The majority of our

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<v Speaker 2>portfolio is invested globally in equities. And so when you

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<v Speaker 2>have a strong year like we've had with the US,

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<v Speaker 2>the S &amp; P 500 delivering just over 20% returns,

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<v Speaker 2>obviously we benefit from that as well. So we have

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<v Speaker 2>a much broader portfolio than just invested in US equities,

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<v Speaker 2>hence we didn't hit that 20% number. But 14.2% for

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<v Speaker 2>the year is a good one and well above our

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<v Speaker 2>expected returns for the year of about 7.8%.

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<v Speaker 1>Yeah, I was about to say I'd love you to

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<v Speaker 1>managing my fund, but you are, because we all own

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<v Speaker 1>this thing, right? Tell us about property. You've also got

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<v Speaker 1>property investments. Do you know, from a financial point of view,

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<v Speaker 1>from an investment point of view, does a capital gains

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<v Speaker 1>tax on commercial property in New Zealand worry you?

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<v Speaker 2>For us, we don't have significant exposure to property. We

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<v Speaker 2>do have very large residential type developments here in New Zealand,

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<v Speaker 2>but in terms of the tax settings, Most of our

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<v Speaker 2>portfolio is invested overseas. By far and away, that does

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<v Speaker 2>most of the impacts with respect to any sort of

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<v Speaker 2>tax impost or position on the fund. So the tax

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<v Speaker 2>settings here domestically actually probably wouldn't have a very material

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<v Speaker 2>impact on the fund.

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<v Speaker 1>Much of a muchness. Would it affect your appetite for

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<v Speaker 1>investment in New Zealand property businesses?

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<v Speaker 2>Absolutely. Not really, Ryan, because we look at everything on

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<v Speaker 2>a relative basis. And so if we do find that good, strong,

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<v Speaker 2>attractive returns for residential development in New Zealand, alongside with

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<v Speaker 2>potential additional tax, we will evaluate them on that basis.

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<v Speaker 2>And if they make sense, we'll invest in them. Yeah,

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<v Speaker 2>fair enough too.

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<v Speaker 1>Hey, I was listening to, sorry, reading Joe Townsend, your

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<v Speaker 1>CEO's sort of cautionary statement on where the market might

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<v Speaker 1>go to next. This is US equities. You know, a

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<v Speaker 1>lot of people talk about, is there a bubble here?

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<v Speaker 1>will we be able to maintain or sustain the returns

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<v Speaker 1>that we've seen? What's your view?

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<v Speaker 2>Yeah, so we'd be pretty open about this where we

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<v Speaker 2>believe centrally at the fund that markets mean revert. And

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<v Speaker 2>we've enjoyed, especially in the US, 10 years of almost

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<v Speaker 2>compound 15% returns. And that is above the long-term average

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<v Speaker 2>returns of equities, which sits at about eight. And so

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<v Speaker 2>if you've got to hit an average and you've been

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<v Speaker 2>operating above, you're going to have to have some periods

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<v Speaker 2>below to hit that sort of average number. So We

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<v Speaker 2>have lowered the expected long-term return forecast for the fund

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<v Speaker 2>from about 7.8 down to 7.2. That's not a permanent setting,

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<v Speaker 2>but we do expect some softness in global equities, especially

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<v Speaker 2>over the next decade or so.

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<v Speaker 1>You know, when do you expect we'll start seeing some

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<v Speaker 1>kind of correction?

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<v Speaker 2>Well, Ron, if I'd love to know that, I probably

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<v Speaker 2>wouldn't be working here. But the important part of it

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<v Speaker 2>is that We don't try and predict turning points in markets.

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<v Speaker 2>We set a long-term view, and that's critical to underpinning

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<v Speaker 2>our long-term investment philosophy. What it does do is we say,

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<v Speaker 2>if markets are a little bit elevated, what are the

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<v Speaker 2>settings and diversification strategies we put into the fund to

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<v Speaker 2>make sure that we ride out any volatility? And in

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<v Speaker 2>the long term, New Zealanders are better off because of

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<v Speaker 2>the active decisions we've made in the fund.

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<v Speaker 1>Well, you've got a big responsibility. It's $ 100 billion. It's

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<v Speaker 1>our money. It's our pensions. We'll start withdrawing from this

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<v Speaker 1>fund in 2050s, from what I understand, 2054, something like that.

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<v Speaker 1>What's your background? How did you come to this job?

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<v Speaker 2>Yeah, well, I'll talk on the withdrawals first. Ryan, I

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<v Speaker 2>can talk about background in a minute. But I mean,

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<v Speaker 2>in terms of withdrawals, yes, we have withdrawals in about

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<v Speaker 2>the 2050s, but we are actually New Zealand's largest taxpayer today.

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<v Speaker 2>And so over the next five years, we're forecast to

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<v Speaker 2>pay about $ 9 billion in tax. And we'll receive about

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<v Speaker 2>$ 3 billion in contributions from the government, so net $ 6 billion.

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<v Speaker 2>So we are actually already paying back to the government today.

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<v Speaker 2>All right.

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<v Speaker 1>Humble brag.

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<v Speaker 2>Humble brag. And then as we grow forward, by about

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<v Speaker 2>the 2050s, then we start having formal withdrawals from the fund.

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<v Speaker 2>And then we get to around the 2070s. That's when

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<v Speaker 2>we're peaking as a percentage of GDP. And the fund

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<v Speaker 2>will hit about $ 1 trillion by then under Treasury's forecasts.

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<v Speaker 2>In terms of my background then, I've been sort of,

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<v Speaker 2>it started out in an investment straight out of university,

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<v Speaker 2>did a bit of private equity, worked overseas for a

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<v Speaker 2>bit and did what a lot of Kiwis do, which

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<v Speaker 2>is realise that home is the best place and brought

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<v Speaker 2>my family back and had the fantastic opportunity to work here.