Q+A: NZ Superannuation Fund CEO Adrian Orr

Q+A: NZ Superannuation Fund CEO Adrian Orr - 'we're actively looking' at investing in large-scale housing developments in Auckland

ADRIAN What we’re seeing in China, it is bad in the sense that it’s a brand new market. We’re talking about the Chinese A-shares. You’ve got a whole lot of brand new market participants, locals, and they’ve had this glorious run-up over the last 18 months. They’re off about 30%-plus, but even then over a 12-month period, they’re still actually up around 50%. What is happening now with the interventions is never good for a market, because people lose confidence, lose trust. We ourselves, we don’t have direct share ownerships in mainland China. We are trading through. We have exposure to the whole emerging market area, China included, but we trade through the Hong Kong shares, which aren’t being subject to these one-off interventions. But they are getting smacked around like the mainland shares.

CORIN Are you worried, though, about the wider potential for damage from the sharemarket fall in China? The risk, isn’t it, is that the Chinese economy slows and by that has huge implications, not just for the rest of the world but, of course, for New Zealand. We’re seeing that with our dairy price. You’ve got farms you’re invested in. How worried are you about that wider risk to the economy?

ADRIAN I think we’re always worried. You know, we actively chase concern. We’re looking for risk where there’s the opportunity. With regard to China, without doubt, growth is slowing and the nature of growth is changing, so they’re doing two things. They are trying to shift from being an investment-driven country to a consumption-driven country. You’ve got to go out and get the shopping, doing the retail spending, and that takes confidence in the citizens, and it is a different space for China. So growth will slow, and that will impact global commodity prices. Well, it already has.

CORIN And what about Greece? It almost seems to have been forgotten by what’s happened in China this week, but there is still obviously a massive decision there. Are you worried that a Greek exit would cause again a massive global financial crisis?

ADRIAN I’m not worried about the contagion risk. That will be relatively contained no matter which outcome happens. At the moment, the markets have got priced in a consensus outcome being that they agree to some austerity, the Germans can go home and meet their people and say, ‘We got a deal,’ Greece saves face in their public. But that’s where the market’s priced. If the worst outcome happens, where the actual banks default, the European Central Bank is absolutely prepared and capable to stand in and stop the contagion to other countries. That won’t stop markets overreacting, and we’ll certainly be watching and waiting for opportunities when that happens.

CORIN How’s your exposure to Europe? Because you have been burned with the Portuguese Bank investment. Cost you a couple of hundred million dollars potentially, hasn’t it? So have you learnt from that? Did you pull back? What’s your exposure in Europe and Greece?

ADRIAN Yeah, our exposure is still very positive. You know, we see great value in the European markets. Prices have been so subdued for so long, and economic growth is starting to come back that, you know, we have an active position in the equity markets in Greece— sorry, of Europe. In Greece we have a very tiny exposure simply through our passive portfolio. The Portuguese challenge, yeah, we’re off to court. We’re suing the Central Bank of Portugal because they acted unexpectedly. You know, we’re confident that will play its way out, but that is a very specific, quite technical argument quite divorced from the broad economic outlook for Europe.

CORIN Some people might argue, though, that, you know, big picture here – what on earth were you doing investing in a Portuguese bank when we’ve known for many years since the global financial crisis that Portugal was one of those countries, named the PIGS, that was, you know, looking pretty shaky. Shouldn’t we have been steering clear of that?

ADRIAN You’ve always got to say you’re investing; you’re looking for opportunities; you go to places where those opportunities are greatest where you understand the risk. That investment, I mean, just to put it in perspective, it’s less than, I think, a quarter of 1% of the total portfolio was actually in the most low-risk part of our portfolio. The Portuguese Bank still has our money. Our insurance on that money still exists with the Portuguese Bank. What they have done, it appears, acted unlawfully and put the loan back in the bad bank. We were treated totally different to other global investors. If you took that example and multiplied it across the world, that’s how it works, financial markets wouldn’t exist. So, you know, we knew what we were doing. The risk was well contained. This is a one out of the box. It’s not every morning you wake up and sue a central bank, so we think we know what we’re doing.

CORIN Okay. What’s your sense about the New Zealand economy? Because there’s a very interesting debate about are we, in fact, looking at sort of recessionary conditions or not?

ADRIAN I think the next couple of years without doubt will be tougher than what we’ve come through. We have been on the back of probably the largest terms of trade positive shock that we will see in our lifetime. That has been an exception, not a rule, and that’s now over. You know, that’s been the last three to five years, the key story that has driven it. We’ve done pretty well with that money. We’ve gone off and built some new infrastructure. We’ve gone off and tidied our houses up. We’ve created jobs, employment. But it’s not going to keep coming like it has done. It is going to get harder. The great thing with New Zealand is we have a currency, and so the exchange rate is already reflecting those harder times ahead. You know, it’s come down from 88 to 66, for example. That is a fantastic shock absorber for the competitiveness of this country. But, yes, it’s going to be harder for the next couple of years, without doubt.

CORIN Given the size of your balance sheet and how much money— you know, that long-term horizon, if New Zealand is going to do it tougher over the next couple of years, will you look to invest more here, make more opportunities here? Can you invest more here?

ADRIAN I really hope that we do find more opportunities. You know, I agree. That’s the right question – can we? We are actively looking all of the time, but it’s very difficult. There’s not a lot for sale, when it comes down to it, at prices we think reflect the long-term value. A lot of our assets are either Crown owned or collectively owned through Maori structures or different cooperative structures, and their patience and relationships are what really matters for us.

CORIN But let’s take farming. So, I mean, obviously, if a lot of dairy farmers come under stress in the next couple of years, we could see some sales. We could see some opportunities open up. It could be foreign companies that come in and try and snap up those farms, or it could be you guys.

ADRIAN That’s right. That’s right. We will certainly be— We are continuously and always looking for investment opportunities. At any one time, we probably have half a dozen on the boil. At most, you might complete one or two a year. I mean, the Kaingaroa, the Z, the Datacom, Metlifecare, a long list, including our private equity money, that’s going. So we’re constantly in the market, but we have a discipline. Some of the prices we’ve seen for farming over the last couple of years we thought was unjustified, and that is proving to be the case. So we’ve built— We’ve got a dozen dairy farms, but we haven’t bought one for a couple of years. That doesn’t mean we won’t be looking going forward.

CORIN So the overall fund – you know, as you say, you’ve got it up to 30 billion, but that’s without government contributions for some time. Does that put more pressure on you, given you’re not getting those contributions, or we don’t know when we’ll get them, to get those higher returns?

ADRIAN No, it doesn’t shift our risk appetite. Our risk appetite is very much focused on our purpose in life, which is to be able to make hay for the next 20 years and start feeding out for when the retired people need that money. So our risk appetite is very well defined irrelevant of the capital coming in. What does make it hard is to actually have the full impact in 20, 30 years’ time. The fund would be at 47 billion now if contributions had continued, so that means there will be less money to be immediately at use in 2040 when you retire.

CORIN I just wonder too on the investment in New Zealand thing whether you’ve taken much of a look at housing. Have you given any thought to getting involved in investing in large-scale housing developments in Auckland? I mean, that would seem to be where a lot of money is being made. Surely on that basis, you should be looking at it.

ADRIAN Absolutely, and we are. We’re actively looking. We’re involved in various due diligence and transaction activities all of the time. I agree. I mean, to be able to be involved in mixed community development, be involved in fast-growing areas, that’s a fantastic investment opportunity for the fund. But it’s really hard to get capital invested. You’ve got to get access to the land; you’ve got to have the capability to do the structures; you’ve got to get through all of the processes around investing. We’re running very hard with some very strong and trusted partners, and I hope in the next couple of years the public will see some of the outcomes from that.

CORIN What sort of scale are you talking about here? Are you talking large-scale home developments in Auckland that you’d like to be involved in?

ADRIAN Yes, large scale. I mean, for us to write an equity cheque, a direct investment, we prefer to be investing at least 100 million or north in any one cheque because you have to do as much due diligence on 100 million than you do on 10 million. So we are looking to be able to partner with people where you can deploy capital not on just a one-off basis also but cookie-cut those investment opportunities around the country.

CORIN So are we talking about, what, like Fletcher Building and companies like that you’re trying to work with?

ADRIAN We’ve worked beside them on different types of infrastructure projects, some where we’ve been successful to get the go-ahead, others where we’ve missed out in the bidding process. We’re working with other co-investors. Ngai Tahu and Tainui are both very close friends of ours we look to invest with and with other managers and other peer funds. For example, we co-invest with the Canadian funds in the forestry. So we’re always looking for the right opportunity and, most importantly, the right partners to do the business with on the way through. We’re fund managers; we’re not builders.

CORIN And is this something, in terms of the housing in Auckland— Housing – we know there’s a shortage there. We know that the Government wants to see more houses built. Is this something you’re looking at purely as dollars and cents – it’s the best investment – or is it the Government’s said, ‘Hey, we’re going to give you a directive here. We want you to invest more in housing’?

ADRIAN Yeah, no directive. That’s not possible within our act, which is a fantastic thing that gives the public confidence that it’s about dollars and cents that we’re after. That means that we only buy when we think it’s going to be the best possible use of our capital. At the moment, I believe the area’s growing so quickly that there must be opportunities there. The challenge is – is it already in the price? Are people already paying too much? So, you know, we’re doing our work, and I’m confident that it will pay off.

ENDS

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