11 August 2016

New Model Proposed for Perpetual Investment Fund

The Council’s Perpetual Investment Fund (PIF) could move to a new management model from March next year.

Following an independent review, council officers are recommending a full outsourced model for managing the PIF, overseen by a guardian entity.

The review, conducted by investment bankers Cameron Partners, followed the successful sale of Tasman Farms. Both the Council and current PIF managers Taranaki Investment Management Limited (TIML) agreed that that the sale represented an appropriate time to review the future management of the PIF.

Chief Financial Officer Alan Bird says: “The recommended change is not about fund performance, as the performance of TIML has been above industry benchmarks, with the PIF earning an average after-tax return of 7.0 per cent p.a. and returning close to $190 million in release payments to the Council since inception.

“The recommended change reflects the maturing of the funds management market, new governance models and utilising options that were not available when the PIF was established.”

Under the proposed model, to be considered at the Council meeting of Tuesday 16 August, the residual shell of TIML would become the fund’s guardian entity and be renamed as New Plymouth PIF Guardians Limited.

Mr Bird adds: “The Cameron Partners report recommended a full outsourced model, following testing of the market to assess the availability of services and costs. A request for information was issued last month and this has confirmed the services available and that full outsourcing is likely to be cost neutral.”

The TIML board has also provided a number of recommendations to the Council for a change to the PIF management model, including seeking:

• Establishment of a guardian entity (like NZ Super).

• Separation of fund management from the guardian governance role.

• Clear delegations being defined for the fund managers.

• Separation of duties and clear communication channels.

• Managing and restricting political and organisational interactions (proximity).

The full outsourced model was recommended by Cameron Partners as the best way to:

• Achieve segregation of key functions.

• Remove the ‘proximity risk’ by limiting political and organisational interactions.

• Ensure the most simple and transparent PIF management model.

The PIF – a brief history of high performance
New Plymouth District Council created the PIF and TIML in 2004 with the $259.4 million proceeds from the sale of its shareholding in Powerco.

The PIF has been in place for almost 12 years, the last eight years managed under an independent model. It has paid close to $190m in release payments since inception and the fund balance at 30 June 2016 was $268 million.

The investment outcomes achieved by TIML have outperformed fund manager benchmarks, with after-tax returns of 9.5 per cent p.a. (benchmark -0.5 per cent p.a.) for the past year, 12.5 per cent p.a. (benchmark 6.5 per cent) over the last three years, and 7.0 per cent p.a. (benchmark 6.4 per cent) since inception.

The purchase of Tasman Farms was made in 2008. Due to its size, the acquisition, expansion and sale of this asset were all approved by the Council.

While the acquisition used much of the fund’s spare liquidity, and the increase in farm valuations significantly increased the proportion of ‘alternative assets’ beyond the agreed asset allocation, TIML successfully exited in 2016 at an 11.3 per cent rate of return p.a. after tax, following eight years of ownership.

The investment was ultimately successful and outperformed benchmarks by more than 6.0 per cent p.a.

In 2013 the TIML Board set a future limit whereby no more than 10.0 per cent of the fund would be invested in a single asset, to prevent a similar future concentration risk and to support diversification.

The Global Financial Crisis (GFC) and its aftermath have impacted investment funds, pension returns and interest rates globally. This includes the PIF. Ongoing councils have grappled with this and while in retrospect the release rule (which limits the size of annual release payments from the PIF to the Council) could have been reduced more quickly after the GFC, actual release rules were adjusted, over time, as follows:

• In the financial years (FY) from 2004 to 2008 the Council received a fixed sum release averaging $21.5m per year.

• In FY2009 a release rule was adopted, initially set at a base of 5.6 per cent, pre the GFC. Release payments averaged $21.3 m for the next four years.

• From FY2012 the Council reduced release payments and the release percentage to 4.0 per cent. Release payments averaged $7m in the following three years.

• From FY2016 the Council lowered the release payment further to 3.3 per cent, and the smoothing mechanism (a formula for ensuring greater consistency of release payments year on year) was reset.

Mr Bird says: “Realistically we should only plan to expect returns averaging around 7.0 per cent p.a. in the current environment.

“This is still above the Council’s cost of servicing debt and therefore adds value to us, as well as keeping our debt and investment management functions separate.”

PIF Performance

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