Deep Thoughts by Adrian Orr

Ashby Monk

I caught a really interesting interview with Adrian Orr, who is the CEO of the New Zealand Superannuation Fund, on NZTV. In it, Orr opines on the state of the global economy, and how the NZSF is changing its position to take advantage of this new geography of investment. Now, I have to say it, the interviewer’s grasp of the subject leaves something to be desired — i.e. he cuts off Orr a couple of times just when things are getting interesting; nonetheless, Orr manages to say some noteworthy things.

First, I was particularly interested in his position on illiquid assets. He says the fund is investing aggressively in assets that match with its long-term time horizon:

“We’ve increased exposure to property. We’ve increased exposure to some ‘distressed’ type assets globally; increased exposure to forestry; increased exposure to infrastructure, airports, tollroads…”

As I noted last week, there are lots of other SWFs that are following suit, moving more aggressively into these types of assets. And I think this is a very good thing. Investors without liabilities (or at least liabilities not coming due for decades) should be going long! So, I agree with Orr completely on this and am pleased to see the NZSF investing accordingly.

Second, I was also quite interested to hear Orr justify the existence of the Kiwi SWF on financial grounds:

“The investment proposition [of the NZSF is as follows]: the borrowing rate at which government can raise money which is one of the lowest…the lowest in an economy…. Our challenge is to earn more than that rate with a healthy profit, and we’re confident in doing that.”

I’m not a huge fan of this logic, as it reminds me a bit too much of US state and local governments issuing Pension Obligation Bonds in order to make pension contributions. Now, Orr may be right (in fact, he is almost certainly right), but if we truly believe this, then why doesn’t the NZ government just continue to issue debt for investment in the markets? (…right up until the government’s borrowing cost meets the SWF’s expected return…) The simple answer is risk. It’s a very risky strategy for governments to issue debt for the purpose of investment in financial markets.  As we all now realize, the stock market isn’t as reliable as we may have thought. In contrast to Orr, I guess I prefer to justify the existence of the NZSF as a commitment mechanism for pension saving (rather than highlighting its effectiveness as a government-run investment strategy based on an actuarial arbitrage between borrowing cost and expected return.)

Anyway, there’s a lot more interesting tidbits in the interview, which you can watch here.

*2:30pm: Updated analysis and one of Orr’s quotes .

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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