141: From the Archives – NZ Super's Matt Whineray

In this interview from November 2023, we speak with Matt Whineray, then CEO of New Zealand Super, to celebrate the fund's 20th anniversary. Established in 2003, with an initial contribution of NZ$2.4 billion, the fund has achieved an impressive average annual return of 9.5 per cent over this 20-year period, adding NZ$40 billion in value. We delve deep into the fund's strategic tilting program, which has been a significant contributor to its success, and this interview contains the startling admission that NZ Super once held a short position in the NZ dollar that grew to 40 per cent of the net asset value of the fund. Overview of Podcast with Matt Whineray 01:00 NZ Super started investing in September 2003 and now has a 20-year track record 03:00 One of the key starting points was to get the risk position right and get the board to understand this position 04:30 The 20 year track record: the country is about $40 billion better off as a result of the creation of the fund 07:00 The fund invested in private equity only two years after the beginning. 8:30 The strategic tilting program; the philosophy behind it and the early days 14:00 There are times when you get tested and 2013 was one of those times 15:30 I borrowed this one from [AQR's] Cliff Asness: 'Don't size a strategy so that when it goes wrong you are dead'. 18:30 The amount of risk that we allocate to our strategic tilting process is definitely the highest of all of our internal strategies 20:30 The strategic tilting program has evolved from trading once a month to trading every day, sometimes multiple times a day 22:00 Introducing the reference portfolio; the beauty about the reference portfolio is that there is real clarity about the decisions that are being made 26:00 Since inception the decision was made that we always hedge the reference portfolio 100 per cent back to NZ dollars, and that is one that is always debated at reference portfolio reviews 28:00 Managing NZ equities in-house 31:00 What else do we do internally? Portfolio completion credit strategies, direct investment and strategic tilting 33:00 Embracing responsible investing 36:00 There is no downside to us helping our friends in the region 37:00 Preparing for the drawdown period 41:00 New Zealand Super has been experimenting with an AI portfolio. What is this? 44:00 Leaving the fund after 15 years and Matt's favourite moments with the fund 45:30 Early 2020, I had a radio interview where I was telling the interviewer that we just went from $48 to $35 billion. The fact I could say that is a testament to our stakeholder management and the education we've done along the way Full Transcription of Episode 141 Wouter Klijn 00:11 Welcome to the [i3] Podcast. I'm here today with Matt Whineray, who is the Chief Executive Officer of New Zealand Super, and today we're celebrating 20 years of the fund. Matt, congratulations on this milestone! Matt Whineray 01:26 Oh, thank you very much, and thanks for having me. Wouter Klijn 01:29 Excellent. So there's a couple of dates that we can take for these 20 years. I think the New Zealand Super Innovation and Retirement Income Act was passed in 2001, and that set up the structure of what is now New Zealand Super. But it wasn't until 2003 that the fund received its first contribution, which I thought was 2.4 billion New Zealand dollars, and started investing later that year. So it's actually in I think October this year that we have a 20-year track record of the fund is that right? And can you share some of the learnings from that period? Matt Whineray 02:08 That is right. Yes. So it took a bit of work between the passing of the legislation and 2001, and and kicking off. So getting a team, getting the team together, and those those board and those first few people that were were involved. That's right. We got the money on 30 September 2003. I understand it actually. We we invested almost straight away, some of it anyway, and had got set up to to be ready to do that. So yeah, it's been a big a big moment for us taking over 20 years and an opportunity at that point to sort of reflect on on how we've changed since then, and we've changed quite significantly, but also what we've learned. So, from a from a lesson perspective, I guess probably the most important ones are get the get the long term risk setting right, understand how you think that might perform along the way, and then spend as much time as possible making sure that stakeholders understand that. And so, how it might, how it, why you've done that, and and how it might operate. As as an investor, we think about our as a long horizon investor, we think about our our key risks as being two big ones: liquidity. So running out of liquidity is pretty terminal, and stakeholder support. And so we spend a lot of time thinking about how we manage those in order to be able to get to the long term. Because if you're a long horizon investor, you care about what the return is over the long term, but if you cannot survive the journey, the destination doesn't matter. So, so we think hard about those. And the other one of the other critical foundational things that we've done is is being really clear about what our advantages are as an investor. So we call these endowments. We don't have a lot of advantages, but they are important. So things like long horizon, our operational independence, our governance, our strong governance model, and our sovereign status are all critical. And aligning our investment strategy with those endowments and with really clear investment beliefs is really important as well. So those those are sort of the big things that we've we've learned along the way. We didn't. We certainly didn't know them all at the start, and we found out as as we've gone along. Wouter Klijn 04:27 New Zealand Super always has a strong focus on on governance, but of course we also would like to know the numbers. Have you crunched the numbers for the 20 year track record? Matt Whineray 04:35 Yeah, we're about 9.5 per cent per annum over that over that 20 years, and I guess most critically, from a from a national perspective, the the country is more than $40 billion better off as a result of the creation of of the super fund. So, if you think about the alternative use of our of the contributions we have received, would have been to pay down government debt. We have we. Beaten that benchmark by more than $40 billion, and within that 40 billion, we've also added about $16 billion of value over our risk equivalent benchmark, our reference portfolio, which we'll get onto later on. But yeah, so we've we're very happy with how those how those numbers have turned out. Wouter Klijn 05:17 Excellent. Of course, governance is really important, but when we look at sort of the investment approach, can you tell us a little bit about, you know, the early days in terms of the asset classes that the fund started with and how that has evolved over time? Matt Whineray 05:32 Sure. So in our in our right at the outset, we were a pretty traditional SAA approach. We had in that global equities, New Zealand equities as a separate asset class, and global was both developed and emerging markets, global fixed income, and then we we also had a reasonable, reasonably significant allocation to private market assets. So those were in those days, private equity, timber, infrastructure, property. When I turned up in 2008, we had this other category that was called other private markets, which was kind of whatever else we found that was kind of interesting. And so we had a pretty big allocation to that to that private markets in that early SAA. But I think right from the outset, we've had a pretty growth-oriented portfolio. So it might have started at about sort of 7030, moved to 8020, and then our reference portfolio has been 8020 since since we implemented that, which was about seven years into our into our operation. So we've always we've always sought to take advantage of our long horizon and our relative lower need for liquidity, and allocated across those broad range of asset classes. Wouter Klijn 06:49 Yeah, is is that why the fund started relatively early investing in private equity? Because I think I looked it up, and it was only two years after the fund started investing that the first private equity investment was was already made. Matt Whineray 07:03 Yes, so we had some small private equity funder funds earlier on, and some secondary secondary fund and a more traditional GP commitment. That was part of that that SAA allocation. So we, as a result of that that original construct of the SAA, the team was focused on on private markets. That that allocation to private markets was about 35 per cent in the in the early versions of the SAA. So a pretty chunky one. And so the team the team got on with with thinking about how we could how we could gain that exposure. Wouter Klijn 07:37 So what was the inspiration for that? Was that sort of you know, a lot of the the Australian funds look at the Canadian peers, and they obviously have a very heavy allocation to private assets. Or was it more that long term investment Matt Whineray 07:51 horizon? Well, it was definitely a long term investment horizon. But I think early on, the some of the the people in the or investment people in the organisation certainly also looked at not just the Canadian peers, but also some of the U.S. endowment models as well, which had significant significant exposure to private equity in particular. And I think right at the outset as well, we were we were almost we were entirely outsourced. You know, when we kicked off, we're obviously using external managers, and that was the approach that that was taken to get exposure to some of those different asset classes that were included in the SAA. Wouter Klijn 08:27 I think one of the things that really sets New Zealand Super apart is the strategic tilting programme. That is not not not something that you see, especially not at the scale that I think New Zealand Super has implemented it. Can you tell me a little bit about you know the philosophy behind it and why it was chosen to implement that? Because I think it it first started in 2009, so about six years after the fund first started investing, which was relatively quick. Matt Whineray 08:55 Yes, Wouter Klijn 08:56 tell me a little bit about the philosophy. Matt Whineray 08:58 Sure. So the strategic tilting came out of a lot of work done by our asset allocation team under the leadership of Neil Williams. So Neil had been in in the asset allocation team at UBS Asset Management and worked with a couple of other guys, guy called Brian Singer and Renato Staub there, and he had brought with him this this thinking around a dynamic asset allocation approach, and the idea of it for us was was to take advantage of our belief that we can have a a more constant relative risk aversion than the market. So as the market gets excited, or the market gets depressed, and we have a if we have a long run view of the equilibrium value of a particular asset class. Then, as it gets depressed, we can we can add exposure, or as it gets excited, we can we can reduce exposure and do that in a systematic way. So, what we're trying to do is remove our own behavioural biases by creating a systematic, dynamic asset allocation approach. So. The team did a lot of work on on setting that up, thinking about what the governance of it ought to be. How do we make it efficient? How do we remove our personal biases as markets get really you know volatile and overcome that to be to be systematic in that? So it's not about waiting for a market to get to an extreme, and then putting a position on it's saying, "Hey, if the market's gone down and it's and there's a gap between what we think value is and prices, then we will add exposure and we'll we'll be systematic about how we size that. Then if it goes down the following day, then we'll add some more. If it goes down the next day, then we'll add some more. But what's happened in that moment is that the last two days are now worth less. So we've got a we've got a mark to market P&L loss. So it took quite a bit of of work with the investment committee and also with the board to approve that strategy because you know the darkest hour and that one is right before the dawn. As you get further and further away from fair value, and you've increased your position either in a long way or in a in a short way. Your mark-to-market loss will be at its peak at the moment. That at the moment where you forward-looking have the have the highest expectation in terms of return. So it takes a lot of work to be able to hold on to that. You have to size it right to start with, so that you don't get you avoid two things. There's two really important things with tilting strategy. One is you don't you don't lose your bottle at the wrong time, and that's really critical because as soon as you you've stopped out, you've lost that, and there's no hope of getting it back. The other is getting your sizing right so that you've got a reasonable allocation of risk through the through the sort of different VP gaps, and because the worst thing is to have used all your risk while the market is just being volatile beyond where you where you got your positions on. So that that took quite a bit of work to get all that done, but we kicked that off in March 2009, and frankly, that was a good time to do it because if you draw the graph, that is the low point of the equity market. So we were we were very fortunate in terms of kicking it off there. It was interesting because we had said to the board, "Look, you know, we may be out of the money for a long period of time here, and we'll all have to you know hold hands and make sure that works, and then what happened was we put some positions on, and the market immediately went off. And the board said, "Oh, that was easy. Why don't you do some more? Wouter Klijn 12:30 Yeah, and and from memory, I think one of the ways to sort of get the board along with this programme was that you you had specific people on the board that were sort of selected to go in in sort of a deep dive into this programme, so that they almost became spokespeople for this programme on the board itself. How has that developed over over the years? Did it once you had that initial success, did they immediately became much more comfortable with it, or have questions been raised during the years whether we should continue this. Matt Whineray 13:02 Yeah, look, I I think it's you know as boards change in terms of personnel, it's always important to keep them up to date with what the genesis of a particular strategy was and what the basis for it is and how it connects with our endowments or our investment beliefs. It certainly has taken a lot of time for us, you know, keeping the board refreshed on how the thing works and how we expect it to work, and why, why in a model where once a when a when a market hits a particular level, we buy some exposure and then it goes down and then it goes down and then it starts coming back up. We will we will demonstrate that over time that should generate us a return, and so we've we've done a lot of work with the board on that. But absolutely, there are times when that will be tested. So if you fast forward to 2013, we had a time when the the Kiwi dollar was very strong against, in particular the U.S. but other currencies as well. And what happened was, in those days, we had a our tilting programme was really the Kiwi against like the world basket of currencies, and and so what happened was we slope we increased the short position in the Kiwi, and it got very large, like up to nearly 40 per cent of the NAV of the fund, and that starts to create nervousness because to get to that short position as the Kiwi continues to go up, we're losing money each day on what we had put on yesterday, and so that that really focused the mind of the board and of the investment committee and of the tilting team and everybody on on that position. But we saw in the end that that you know the the Kiwi reverted, so it is a this is ultimately a mean reversion strategy. We we expect things to revert to that that long run equilibrium at some point. There'll obviously always be volatility, but it did, and so we got through that. But that that was a a real moment of tension, and. One that required, you know, careful understanding of the basis for for the strategy. Step away from the positions and the P and L and all that sort of stuff. Go back and say, well, has the has the basis for the strategy is that still exists? Do we still believe in some long run value? Do we still believe in mean reversion? And then, if we've sized it correctly, then then we can we can survive it. So that's the key with these types of things. Is over time we have increased the active risk allocated to that. We we doubled it a couple of times from the from the outset. But you always need to make sure that you size a strategy. I I pinch this one from Cliff Asness. Don't size a strategy so that if it goes wrong, you're dead because you know that's pretty fundamental. And so that's that's how we've thought about that. Get this, get the sizing of the active risk budget right. Wouter Klijn 15:52 Yeah, yeah, for sure. Because I think we we spoke in 2019, just after Willis Towers Watson did a review of the fund, and and they brought this up. They basically said the tilting programme is quite unique, and perhaps the board should look at it and reconfirm whether they're comfortable with the amount of risk budget it takes up. And I think New Zealand super did that, and they said yes, we are comfortable with that. Did that sort of 2013 experience help with formulating the thoughts around that query of Will Stars Watson, where you basically because you went through that exercise and got into a situation where it was quite uncomfortable, I suppose, to hold that position. That it was then easier to state that you were comfortable with it a number of years later. Matt Whineray 16:43 Yeah. So a few things that happened. The team continues to develop that tilting strategy, and and some things that happened. So very early on, if you go right back to the start of it, we just had sort of two levers. One was equities versus bonds, and we tilt that, and Kiwi versus you know all the other currencies, the trade-weighted index, and and so it was a pretty narrow strategy. And what the team always had intended to have happen was to increase the breadth of that strategy. So, particularly in the currency side of things, we went from that Kiwi versus the basket to nine different currencies that we could tilt against each other, and so that was a really important change in the in the breadth of the strategy. Now that helped us a lot because then you reduce the amount of risk you've got on sort of one particular view of the equilibrium view of the current of two currencies of a pair of currencies, and so so yes. So I think all of that work helped when we came to that conversation with the with the board following the Willis Towers Watson report to be able to say, well, this is how we think about this. Because at the same time as doing that, we'd expanded the equity bond one to be. I think we've got nine markets in both of those now, and and we tilt equities versus cash and bonds versus cash and and bonds versus equity. So there's a there's a bit more breadth than that as well, and that gave us a bit more comfort. So and funnily enough, what that meant is that our our actual risk budget went down a little bit because because we ended up with a few more positions that were not perfectly correlated with each other, so all of that helped when it came to that discussion with the board to say, are we still confident in this? Because the amount of risk that we allocate to the tilting strategy is definitely the the highest amount of any of our internal strategies, but there is a lot of breadth in there across the different types of of tilting asset class, but it also reflects our confidence in the strategy and critically, its alignment with our endowments and our beliefs. So, so that's why it gets more risk, and that risk has turned out to be rewarded for us. So we've been very pleased with that. Wouter Klijn 18:56 Yeah, and I think in recent years it has also been expanded. I think commodities was added as one of the levers. Can you tell me a little bit about that and what is sort of the plans going forward for this programme? Matt Whineray 19:08 Yeah, so we've got commodities in there as well as REITs. So we sort of took REITs out of out of the equities and thought about whether they might provide us with a different a different exposure or a way of expressing views in a in a way that wasn't perfectly correlated with the other markets that we're doing. So we needed commodities in a pretty small way. Commodities is a bit trickier because you've got both levels and curves, and so there's sort of more variables, if you like. So really, the addition of that is a way of us learning a bit more about those markets. It has a very small amount of active risk associated with it at the at the moment, and and the team are looking to learn a bit more about how how our models work in that situation, our confidence in our models, because in all of these different markets we have a differential level of confidence in you know our our view of equilibrium or our. Of how the how it might track over time, and as a result of that that sort of explicit level of confidence, that will affect how much risk we allocate to it. So, what the team's looking to do is thinking about: well, are there other are there other ways we could express this strategy? Are there different signals we might use? How do we think about how do we think about trading not necessarily frequency but size positions? You know, this thing has evolved in the very early days. We just did it. We traded it once a month. Now the team trades it every day and and sometimes a couple of times a day, depending on which markets are are open. So the yeah they continue. they continue the team continues to develop that to look for again more breadth and ways that we can take advantage of our endowments in terms of that long horizon and and as I say a belief in that slightly more constant relative risk aversion Wouter Klijn 20:59 and how do you keep the costs under control if you trade multiple times a day. Matt Whineray 21:03 Yeah, so that's a debate that the team has very every so often, which is what, how do you think about that trade-off between position sizes and transaction costs? We keep the costs under control by by executing all of the the trades ourselves. So our portfolio completion team does those does those trades? We trade predominantly in futures. Sometimes there's some swaps, but mostly it's futures. And yeah, there's an active an active discussion about how do we how do we make sure we've got the trade off right between position size change and and transaction costs. Wouter Klijn 21:37 Now this programme was in place before New Zealand super embraced the the reference portfolio, and I think that came in in about 2010. So the fund had already been operational for, or at least investing for at least seven years. Why that switch at that time? What what was the thinking behind introducing this reference portfolio? Matt Whineray 21:58 Yeah, so so we'd been we'd been looking at some of the work that had come out of Canada and thinking about that reference portfolio approach. And in those days, it wasn't actually I don't think it was called total portfolio approach. That's sort of been coined later. But yeah, one of our firm beliefs is that you should have some real clarity about whose decision is whose. So let's let's be clear about who's making the big decision about the risk tolerance, which is obviously the board. What the active risk budget should be in terms of the implementation of that portfolio, and then be able to you know determine how how those big decisions have panned out. One of the challenges with an SAA approach, is it's it's impossible to fully replicate the SAA. You can't you cannot ever be at the exact amount of the SAA, and so then you always have a little bit of a confusion about well, are you there because you didn't want to be, or you there because there's just not a it's not available? How do you think about those? What the the the beauty of the reference portfolio approach approach is that there is real clarity about the decisions that are being made. So you've got the big one, which is what's the composition of the reference portfolio, including the asset classes and the currency decision you're making, the Heng decision. Then then the allocation of active risks to management in order to be able to manage that, then says, okay, if we decide to invest in something, so let's buy a forest. We are going to sell some part of the reference portfolio, so we'll sell some equities and some bonds that match the risk. We can we can tell exactly how that decision panned out because we know what the what the what the funding proxy was, and we know what the what the asset return is, so it's very clear that you know when we make those decisions, we we can we can determine how they how they went. So there's this sort of that clarity of responsibility of decision and accountability for outcomes. We we thought was important, but it also helped with our team to be able to say we're not here to just if we've got 10 per cent and allocated to this private market asset class, you know, call it timber or infrastructure. We're not just here to fill that up. We we we need to we need to only put assets into that opportunity if they're actually going to improve the outcomes for the total portfolio. And so the idea of trying to get the team to think more clearly about what is it we're selling in order to buy this thing, what is the relative attractiveness of a forest versus some private equity commitment versus some property development, and how do we get them to think about that? The reference portfolio really helps with underpinning that total portfolio approach, and so that's so there was quite a lot of work went into that before we implemented it and or agreed it with the board and then implemented it in 2010. Wouter Klijn 24:50 And I think the reference portfolio has changed over the years a couple of times. I can remember an instance where emerging markets was part of it, and then that was taken out again and. There was an argument made for a more simple reference portfolio. Can you tell me a little bit about that evolution? Matt Whineray 25:07 Yeah, so some things have come and gone. I mean, emerging markets has always been in there, but but it's been in there. Sometimes it was broken out, so we had global developed markets and global emerging markets with with separate weights, and then we said, "Oh well, let's just take the MSCI, you know, Acwi, and that has dynamic weight, if you like, between the emerging markets and the and the and the developed markets. So, so it's always been in there, but it has been expressed differently. The other things that have been in there, so we've we've always had some New Zealand equity in there. Earlier on, we had a bigger when when the fund was smaller, we had a bigger proportion of New Zealand listed equities in the in the portfolio. That's that's now 5 per cent which is still pretty chunky for a portfolio of our size. We had some listed real estate in there for a while in the portfolio. So so still actually in our annual report, you'll see in some of the really longer term returns, you'll see a reference to to real estate in a reference portfolio calculation of performance. So that's because that was in there at at some point. So so we've stuck to the idea that it is a simple notional passive portfolio. So global equities, New Zealand equities and global fixed income, and then and then the decision on how much we hedge it. And so, the the decision since we since inception has been that we hedge the the whole portfolio 100 per cent back to New Zealand dollars, and that's a that's one that we always debate at a reference portfolio reset. Yeah, Wouter Klijn 26:39 yeah, yeah. So, how close is the current portfolio to the reference portfolio? Matt Whineray 26:44 Ah, it's quite it's quite different to the reference portfolio. So, there'd be 30 something percent liquids or unlisted assets in there, and various different strategies. So, yeah, a reasonable a reasonable difference from the reference portfolio. We have an active risk budget from the board of 4 per cent expressed as a tracking error at the whole fund level, and that's a reason. That's quite a bit of rope for us to sort of you know depart from the reference portfolio with the objective of beating the reference portfolio, and we have been able to do that through those various strategies, including including that strategic tilting one. So yeah, so there's a there's a reasonable difference from the from the reference portfolio, and really what the reference portfolio is doing is setting that long term risk appetite, and then giving management the the leeway to go and deliver that in a way using that active risk, which will which ought to beat that on a on a on a risk adjusted basis. So we're we're not while we're taking active risk, any position that we that we add to the portfolio, we're going to sell something that keeps the total risk constant. That's what the aim is. Wouter Klijn 27:56 Yeah, and you mentioned you have a reasonable chunky allocation to domestic equities, New Zealand equities, and I believe you manage them in house. Is is that right? And what why was that decision made to bring that in house? Matt Whineray 28:08 Yeah. So actually, we've just in the last few weeks we've just gone over 10 years of of doing that. So we haven't always managed them in house. Obviously, we had 10 years before we started doing that. But why do we do that? So at the moment, we we manage it in house, but we also have two external managers of New Zealand active equities. Interestingly enough, it's really the only place that we have active listed equity exposure is in relation to our New Zealand piece. We have in our global equities we we have mostly passive, but we also have some factor mandates run by external managers. But in the domestic one is where we actually have sort of stock pickers, if you like. Why do we do it? Well, from the outset, as I said, we were pretty well. We were entirely outsourced. We had a number of external New Zealand managers. We we set up the the internal New Zealand team because we need we're we're a significant presence in the New Zealand market and we needed to have a way of properly engaging with that market as opposed to just oh well we've appointed these three external managers and they're they're doing it for us so if someone came and said to us well what's your view on this stock we're like well we don't know because you know we're not managing it on an active basis, so we needed really to step up our engagement with the domestic market and make sure that we were properly participating in those capital markets. But also because we we we held the view and still do that there is a there is a positive expected alpha for the average New Zealand active manager, which maybe says more about the benchmark than it does about the managers, but you know, nevertheless, it's there. And so we we we thought that that was something that we could do in house, and and over time that has proved to be the case. So that team has has done you know really well over the 10 years it's been operating. Wouter Klijn 30:00 Yeah, internalisation is a big point of discussion as well here in Australia, where we have a number of funds that have gone down that route. They mainly do it for sort of capacity reasons as well as cost savings. From your perspective, you say you wanted to have a say in the market, have a former view. Does that mean that this will be the only asset class that will be internalised, or are there plans to do that with other asset classes as well? Matt Whineray 30:28 So yeah, so there are a few reasons. There was there was that that reason to be able to engage. It was never really a cost one for us, but we did. It is a space that we thought that we could get the capability internally, and that's one of the big challenges with, you know, internalisation. Is the assumption is that you will be able to get the people internally that you need to do it as as effectively as those external managers that you might otherwise use. This is a place where we thought we would be able to do that. Capacity is an important one though too, because we had seen some change in our external managers in New Zealand over time, and so we ran a little bit of a risk that if we if if we lost one of them or if they fell below a conviction threshold for us and we took the mandate back, that it would be hard to replace that. So so having an internal team was able to we're able to you know, have a bit of flex and and how we manage those external mandates in terms of that internalisation. Yeah. So what else do we do? We well we have a portfolio completion team that that runs an internal credit mandate called we call it the tactical credit opportunities mandate. So that does that does things which look to take advantage again of our endowments and also the strength of our balance sheet. So that's an internal that's an internal function. We have a direct investment team where we make direct investment in unlisted unlisted assets, both in New Zealand and internationally. So that's something that we do alongside either external managers or other other asset owners as partners, we we operate obviously the tilting team internally, but we don't. We're not. We're not wholesale looking to internalise a lot of things. We've always thought about you know why why would we do something versus have somebody else do it? Yes, cost is a factor, but it's not really the key driver for us. We've thought about it as: is it a critical risk function? Is there something that we need to manage? A risk that we need to manage. So that's why we created that portfolio completion team originally. That is to manage liquidity. So at the GFC, we we needed to know what liquidity we had and how much we needed. Well, that was all being done by individual managers externally, and we didn't have really a view of it because we had no market-facing team. So we created that. That's a that's a risk management function, but has turned into a into a value adding function, or it's a place where you can't get alignment, and alignment is really what has driven tilting to be an internal strategy. It's very hard to get alignment with an external manager on that type of strategy because of the the possibility that it is out of the money for extensive period of time, and and that causes you know agency issues with your your external agents. Wouter Klijn 33:18 Yeah. Now another topic that comes up a lot these days is decarbonisation and climate change, and if we take a bit of a broader view, it comes down on the sustainable and sort of responsible investment. Now, I think New Zealand Super already implemented a responsible investment framework in 2006. That's, I think a time when people were still looking very differently at this space. Where did that focus come from? Matt Whineray 33:48 So in our legislation, we've got we've got three bits to our mandate: maximise return without undue risk, use best practice portfolio management, and and do it operate while avoiding prejudice to New Zealand's reputation as a responsible member of the world community, and so the original hook, if you like, for our responsible investment framework back in 2006 was that third one of you know avoid prejudice to New Zealand's reputation. What's been interesting over time as the world has evolved and the investment world has evolved is that those first two maximise return without undue risk and best practice portfolio management have both become increasingly important parts of responsible investment. We did a we did a big piece of work a couple of years ago. We called we called our resetting the RI compass, resetting the responsible investment compass, and we looked at looked at practices around the world and said, "What is best practice portfolio management these days in relation to asset owners like ourselves? And and in fact, what we discovered there is best practice is absolute integration of responsible investment considerations and investment decision making over the long term. So, so and then if you think about that, Max. Return without undue risk. That undue risk language became the the key hook for our climate change investment strategy because we thought, you know, we're not getting paid for this, we're not compensated for that risk. It's therefore undue. So, so all of those bits have been important over at different times to how we've evolved that responsible investment framework from 2006, when we created that, and we were founding signatories of UNPRI to the RI Compass work, which has led to our sustainable finance strategy and our climate change investment strategy, which has led us down the decarbonisation route in terms of the broader portfolio. Wouter Klijn 35:39 And I think New Zealand Super has also put itself in a as a guiding light for some of the regional funds in the Pacific, and I'm thinking especially on sort of that there was a programme where you you basically invited them to co-invest with New Zealand Super in in a private equity programme. Can you tell us a little bit about how New Zealand Super looks at that position, you know, trying to help out the the funds in the region. Matt Whineray 36:07 Yeah, so that one is sort of from an asset owner perspective. There's no there's no downside to us to helping our our friends in the region, you know, lift their capability and understanding of particular issues or strategies, and so we've been involved in the Pacific Island Investment Forum for a while. The fund that you referred to around co-investment was a was a domestic one where we're we've entered into a co-investment relationship with a a private equity fund that we helped sponsor the establishment of, which is a number of different Māori tribes, so different iwi invest in that in that vehicle, and we have co-invested with that with that vehicle and domestic transactions. We've had great benefit from knowledge sharing with our you know our big peers around the world. I think of the you know the Canadian funds and the Swedish funds and the and the Singaporean funds, GIC and Tamasic, and and they've all been very generous in in helping us. And there's a there's a really nice dynamic there where asset owners will will assist others because it it doesn't hurt them, but it helps the overall system to to lift the general capability, and so we we feel that in relation to our domestic and also our our broader Pacific cousins, and and happy to help them too. Wouter Klijn 37:30 Yeah, if we look a little bit into the future, I think New Zealand's super at some stage will go in a drawdown mode, and I think the government has had plans to start drawing down on the fund in 2035, around that time, and that will mean that the fund will probably reach its peak size in 2070. How do you sort of prepare for that change? Matt Whineray 37:55 Yeah. So the the way our legislation works is it's got a it's got a formula in it, which was a you know hats off to the people that drafted that because it was a fantastic bit of drafting. Anyway, that formula is is the way that it gives effect to the legislation's desire to have us smooth out the long term cost of New Zealand national superannuation and Treasury Keeper model, they they maintain the model of that formula, and they publish that on their website, so anyone can go and have a look at it. You just type in you know New Zealand Superfund model, and you can open the Excel spreadsheet. You can change the assumptions. You can you know play around with it. If you're finding it hard to go to sleep, you can do that. It's but it is very interesting, and so that will change depending on what our returns have been, what the sort of forecast view of GDP growth is, what our long run returns are, that type of thing, or what contributions are. And so at the moment, what that model is saying, and that's updated once or twice a year by Treasury, is that in about 2035 we'll go from receiving contributions, contributions decline through till then, to start paying money back to the government to to smooth out that cost. Those those withdrawals, if you like, are relatively small to start with, and then by the time you get to about 2050, they're a bit chunkier. But the way the model works is that we will continue to grow in nominal terms. Our forecast expected returns are higher than the than the than both the tax leakage and the and the withdrawals. We will peak on the current modelling at a as a percentage of GDP about 2080, but we'll continue. We should continue to grow in nominal terms beyond that. So that that's where that very long horizon comes from. So what does that mean for us? It means that there will be some change. We will start to see some liquidity draw in about 12 years' time. It won't be big to start with. And so something that we need to think about there is we as we'll have. You know, we'll have three more iterations of of reference portfolio reviews before then to think about what does that do to us in terms of our view. We'll we'll have some some liquidity requirements. We'll have to produce liquidity each year, obviously, to to make those payments, and that may change our risk profile a little bit. So, don't know what that looks like at the moment. That's going to be something for the the team to work out over the next 12 years as we as we go through that. So we've got a a 2025 reference portfolio review, then another one in 2030, and then you know another one, and based on the current scheduling. Anyway, we do that roughly every five years. Wouter Klijn 40:39 Yeah, Matt Whineray 40:39 yeah, it'll be interesting to see how that that changes our our tolerance. Wouter Klijn 40:43 Now, another part of sort of looking into the future is there's a lot of talk these days about artificial intelligence with ChatGPT, and I was interested to see that in the annual report that came out over last year, there's a paragraph in there that New Zealand Super has been experimenting with sort of an AI portfolio. Can you can you tell us a little bit about that, or is that still in early stages? Matt Whineray 41:08 No, I can talk about that. So it's it's more of a sort of machine learning portfolio. So where we're what what that portfolio is, it's a New Zealand equities portfolio, and we've the one of the team has been has built a model to to effectively construct a portfolio of New Zealand equities that maximises factors that that we believe will be rewarded over you know subsequent periods, and then and then you know rerun that model on a regular basis and do the trades based on on what the model is telling us. It's pretty small at the moment, so we've just got a we've got I think the number at the moment is about 30 or $40 million allocated to that. But we are actually running the portfolio. It's a it's different from you know running a notional one where you're actually saying oh well what what what's the impact of transaction costs? What's the impact of market spreads? The actual impact of running this, and and and we're watching it as it goes, and we're learning from that as we go. So it's quite a it's quite a neat little project that quite a few people have been involved in internally, and it's giving us a an alternative, if you like, an alternative access point for the New Zealand market. So we've got obviously our internal active. We've got this small machine learning portfolio, and then we've got a couple of external. So we've got we've we've got different ways to access that that local market, and and also, but just to learn along the way. That's really what it's doing for Wouter Klijn 42:37 Yeah. So do you think that will become over time a substantial part of the portfolio, or is it more an experiment still? Matt Whineray 42:45 Oh, it's still an experiment at the moment. But I, but I expect if you know if you get some comfort around how how it operates, yes, that will be. I expect that probably even in some of the other work that we do around around our currency hedging or our completion of the portfolio using derivatives, we might we might see some some use of of AI techniques and those as well from an optimization perspective. Wouter Klijn 43:11 Yeah, yeah. So the fund has had a good experience in the last 20 years. It's in a good position to tackle the next 20 years, but I believe that you're gonna leave the position at the end of the year to have somebody else take it over after nearly 15 years with the fund. What's in store for you? Matt Whineray 43:32 Well, I'm planning to go to the beach at the end of the year and stay there for a while. That's my plan. I haven't. I haven't got anything. I'm not going to a role at the moment, so yeah, I'm really just looking forward to spending a bit of time on the beach and getting an opportunity to think about what might what might come next after after as you say, 15 years here and five years in the in the CEO role. But I'll be I'll be very interested in how the how the fund how the fund goes. Wouter Klijn 43:59 Yeah, do you have any sort of favourite memories of that time? Matt Whineray 44:04 Yeah, look, I well, I arrived in May 2008, and so the world at that point that was after Bear Stearns but before Lehman, and I was looking after private markets, and so that was a really interesting position to be in to watch the you know sort of observe the what was then the credit crunch turn into the GFC and the and the carnage that ensued. And being in the private markets was a little bit, you know, private markets just smoother as a result of you only measuring them once a year. So it was a little bit less of a of a crisis than what was going on in public. But that was a great opportunity for me to learn. And then, so so right out of the blocks, I got I got some pretty good lessons and and how to think about portfolio construction. We had a 10 year anniversary. We created a super fund ukulele orchestra that was pretty awesome. That was 2013, 2016. We hosted the inter. International Forum of Sovereign Wealth Funds here, and the most memorable bit about that is that the final dinner was was the night when the presidential election was being reported, and so that had quite a big impact on that dinner. In fact, almost everyone at at the International Forum of Sovereign Wealth Funds can remember that particular meeting in Auckland because of that of that moment, and then look, I think the the last few years have been interesting. That you know, early 2020, I had a radio interview where I was telling the the interviewer that we'd just gone from 48 billion to 35 billion, and as a result of that big drawdown in in fair March 2020, and actually actually the ability to say that without the sky completely falling in was a testament to the work that we've done about that sort of stakeholder management. I talked about right at the start, educating people why we took the risk and what could happen along the way. Since since then, obviously the market rebounded, which was which was great. We're up to 65 billion. We've got a about 200 people. When I started, we had 40, but there are still quite a few people from when I started who are still here, which is a which is a testament to what a great place to work here is. And then most recently, the fund got named best performing sovereign wealth fund in the world for For the last 10 years, so that was you know that was very exciting and a and a great recognition of the of the awesome work that the the people here do. Wouter Klijn 46:30 Yeah, for sure. Yeah, I remember doing an interview a while ago with Bob Maynard, who was the CIO of a state pension fund in the U.S. the Idaho pension fund, and I asked him a question around, you know, which other funds do you look at? And he said at that time, "Ah, New Zealand Super, their returns are just magical. Yeah, I think it's a testament to the great work you guys have done. So congratulations again on 20 years, it was great having a bit of a historical view on it and the development. So, thank you very much for your time and all the best in whatever new role you might end up in. Matt Whineray 47:12 Well, thank you very much. We've we've appreciated our relationship over the years with I three. You've had you've had a lot of contact with the team here, and been it's been a very helpful forum for us again to to share the knowledge because I think that is one of the one of the great things about about asset owners is this this willingness to share and I've been a great beneficiary of that and so you know long may that continue. Wouter Klijn 47:39 Thank you very much. __________ [i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe. 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