Global financial crisis hits GSF returns

Media statement
24 September 2009

Global financial crisis hits GSF returns

The Government Superannuation Fund has recorded an after tax deficit before membership activities of $583.3 million for the year to 30 June 2009, a period where the ongoing global financial crisis took a significant turn for the worse.

The result represents a return of -16.8% on average assets over the year. In the previous financial year the Fund recorded an after tax deficit of $260.9 million, representing a return of -6.7% on average assets.

“Like other growth funds around the world the Fund has been severely impacted by the financial crisis which led to the worst down-turn in investment markets since the Great Depression,” Government Superannuation Fund Authority Board Chairman Tim McGuinness said today.

“This situation was extremely difficult to predict at the start of the financial year and its severity surprised many experts.”

Mr McGuinness noted that the Fund was focused on long term growth and so had a significant exposure to assets such as equities and property.

“While volatility is to be expected in these assets, there have been hopeful signs during the first few months of the current financial year with some improvement in equity markets. The International Monetary Fund recently indicated that recovery has started and several major industrial economies such Germany and Japan have emerged from recession. However, we need to be cautious as the recovery is clearly fragile.”

Mr McGuiness said it was important to note that the significant losses the Fund has suffered over the past two years were the result of extreme events.

“While this has been a disappointing period, we remain focused on maximising returns without undue risk to the Fund as a whole. We are further diversifying the Fund’s exposure to growth assets, we have moved to active management in some areas and we maintain a group of high quality investment managers.

“We also continue to monitor our strategies to ensure we meet our statutory requirement of best practice portfolio management.

“Despite the unusually volatile period, the Board remains confident that its investment strategy is appropriate for a long term fund that is expected to pay pensions for the next 60 years. The current environment has created good opportunities for long term investors.

“During the year active management added value (when compared to benchmarks) for both New Zealand equities (+1.9%) and international equities (+2.8% before hedging costs), although total returns from both asset classes were negative. Active fixed interest management suffered from investing too early in credit securities, but has partially recovered in the second half of the financial year. The Fund benefited overall from the diversification into a global multi-asset class fund and global tactical asset allocation, but total returns were impacted by the cost of hedging foreign exchange in a volatile market.”

As at 30 June 2009 the Fund’s net assets stood at $2.65 billion, down from $3.53 billion in 2008. The reduction reflected the investment deficit and payment of members’ entitlements.

Mr McGuinness said the performance of the Fund did not impact on members’ entitlements as these are set by the GSF Act. Any shortfall is paid by the Crown.

The Authority is required to manage the Fund in a manner which avoids prejudicing New Zealand’s reputation as a responsible member of the world community. During the year the Authority resolved to exclude direct investments in companies understood to be involved in the manufacture of cluster munitions and nuclear weapons.

ENDS

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