Q+A’s Paul Holmes Interviews NZ Superfund CEO, Adrian Orr

Points of interest:

- Super Fund boss wants to convince government to re-start contributions now global financial crisis is over

- Orr “disappointed” government cut contributions, argues it’s wiser to borrow to save – “Our challenge is to earn more than that [borrowing] rate with a healthy profit, and we're confident of doing that.

- “always danger” of a double dip recession, but Fund sees “enormous growth opportunities globally”

- Now’s the perfect time to make money, Orr says, as the Fund increases its stake in equities

- Super Fund is increasing its exposure to property, distressed assets, forestry and infrastructure

- New Zealanders looking to save long-term should have “highly diversified growth portfolio”, not bank accounts and property, but are “terrible at that”

- New Zealanders “naïve” investors, so compulsory savings is the “worst [option] except for the others”

The interview has been transcribed below. The full length video interviews and panel discussions from this morning’s Q+A can also be seen on tvnz.co.nz at, http://tvnz.co.nz/q-and-a-news

Q+A is repeated on TVNZ 7 at 9.10pm on Sunday nights and 10.10am and 2.10pm on Mondays.

ADRIAN ORR interviewed by PAUL HOLMES

PAUL Baby boomers getting ready to retire are going to be delighted to hear from the head of our Super Fund that the outlook for investment returns over the next few years is looking good, looking better than it has been. Adrian Orr is head of the fund which began investing in 2003. The fund was set up by the Labour led government, this is the Cullen Fund of course, to provide a guaranteed state pension to all people 65 and over. So what's Adrian Orr’s advice on what we should do with any savings. Good morning to Adrian Orr and welcome the Chief Executive Officer of the New Zealand Superannuation Fund, Adrian Orr, same person. Thank you for coming.

Can we just talk about things globally first. How do you read the state of the world and New Zealand economies at the moment. But Ngan Kee yesterday was still talking about jitters.

ADRIAN ORR – CEO – New Zealand Super Fund Undoubted there are jitters out there globally, and rightly so as well. I mean we are going through what I consider an incredible transformation in the global economy.

PAUL Its cataclysmic isn’t it?

ADRIAN Not at all.

PAUL Of cataclysmic proportion I spose.

ADRIAN Oh I think historically exciting and interesting proportions, and I know that we get too wrapped up in the here and now. I mean the New Zealand Super Fund is about 20+ years ahead and I'll come to that. In the here and now what you're seeing is a rebalancing, and it's such a boring word, but the OECD countries, developed countries, basically consumed this income last decade, and they're paying a bit of it back now. Who are they paying it back to? The net saving countries, and often known as the bricks, in particular China, those who are holding large pools of capital savings.

PAUL So we should become a brick?

ADRIAN It would be lovely to be a brick.

PAUL Right, there's a worry that we seem to be on the point of recovery…

ADRIAN By the way a brick is a Brazil, Russia, Indian China type fast growth economy.

PAUL Yeah well they're places that are not going to fall over … Are we on the point of recovery or is there a danger of a double dip recession?

ADRIAN Always a danger, but that’s certainly not a central scenario from where we're sitting. We can see enormous growth opportunities globally. Now how is this country going to do it? I mean we have been primarily carried away with consuming. We need to do more of our producing. To produce you need to be the owner of the capital. You need to be able to put that capital to work. You need to be able to create things and sell things to other people. So that production side, the supply side of the economy will grow, and we are well poised as a country to be part of some of the biggest growing areas.

PAUL But you're speaking now as an economist, not the head of the super fund aren’t you? What is your role as the head of the super fund?

ADRIAN Our role is to save dough today, to be able to feed out in about 20+ years. We are a very long term investment fund. We don’t have to pay capital out to retired people until 2031, so we can afford to sit back and actually look at times now as the perfect opportunity to make some money.

PAUL But isn’t your job very simple. You're given a great wad of cash and you're told go and make it more cash?

ADRIAN Yeah.

PAUL So you're investing again Mr Orr, three billion dollars, you invested last month in the international markets. Why and where?

ADRIAN That three billion dollars is interesting, we report our holdings every month. Anyone can go on to our website, they can see what our actual investments are and what our performance are, and I certainly encourage people to go in and have a look there. The more that people know what we do then the easier it is for people to communicate with. We have a long term horizon, so we are highly exposed deliberately to growth assets. What do I mean by that…

PAUL Adrian, I want to ask this very simple. You spent three billion dollars of the funds you got in the last few months. What did you spend them on, where are you looking?

ADRIAN We invested 16.4 billion last month. We didn’t spend three billion. What you’ve seen is some reallocation of that investment from some types of assets exposure to some companies, across into other types of assets. What are we invested in? We are invested in global share markets, across the US, Europe, Asia, right across the world, across all company types, whether it's from industrial, consumer, pharmaceutical, you name them. We have those listed equity exposures and we are also invested strongly related to what we see as our competitive advantage being our long term horizon.

PAUL When you say invested 16 billion, your fund is worth about ..?

ADRIAN About 16.4 billion.

PAUL So you’ve got 16 billion out at all times, but nevertheless this particular three billion is what you’ve been putting around the place. When you're talking about the international markets, what kind of stocks? I mean it's quite old fashioned what you're doing. You're buying stock that’s damaged in the downturn, or is being punished price wise with the downturn and you're buying them cheap?

ADRIAN I wish I could give you a single answer, and I'm not trying to be tricky here The answer is we're investing across lots of different types of asset classes. We've increased exposure to property. We've increased exposure to some distressed asset type classes globally, in different place.

PAUL Example.

ADRIAN Around – say property around the New York type region, around the Asian type region. We've increased our exposure to forestry. We've bought forests in Australia. We’re New Zealand’s single largest forestry holder. We've increased our exposure to infrastructure.

PAUL So you're into Vienna International Airport?

ADRIAN Airports, toll roads, all sorts of types of infrastructure.

PAUL And these are where you’ve seen opportunities at a good price.

ADRIAN That’s right. We have many different agents working for us. We spend a lot of time selecting good people who can select good assets, and we direct invest ourselves. We've got a very aggressive portfolio of challenge going on, even just here in New Zealand around what we want to invest.

PAUL So for a person who was listening to you for a little bit of a hint, and looking for opportunities to invest outside of the property market, you're looking at infrastructure inly, infrastructure possibilities?

ADRIAN I'm gonna say that old trite one. Please don’t try this in your own home. You know the important thing for people to understand is if you have got a long term investment horizon and you don’t need the cash now, then you should be exposed to a highly diversified growth portfolio. New Zealanders are terrible at that. Instead we are really conservative, we like to just have money in the bank or money in the property, and we all go, oh that’s better it's certain. No it's not. The only thing you're certain of is not getting exposure to the future international returns.

PAUL Isn’t it interesting that the Viennese the Austrians are quite happy for New Zealanders buying into their airport, we won’t allow anyone to do the same here at Auckland. But anyway let's move on. The government was hoping, when they were elected, Bill English was hoping that you'd start to invest some 40% of your portfolio in the New Zealand economy. You’ve resisted that. Can you explain simply why?

ADRIAN Yeah the 40% was an aspirational comment before the National government were elected. The actual directive that we've received is for us to actively seek and consider New Zealand investments…

PAUL Well that’s after you made great protestations to it of course. What are the dangers? I mean the danger being if you pour billions in.

ADRIAN That’s right, it's a small bucket, and you know if you suddenly turn around and say 40% you know here's six dollars bang thank you, well you know which way the price is gonna go of the assets. They're gonna run away.

PAUL Yes so if you say you're gonna put a billion in Fletcher Health….

ADRIAN Well there's just not six billion dollars worth of things to go and buy. It's incredibly difficult. The listed equity market we already you know have a significant holding, and you know we're the elephant in the room. We come towards the equity market the prices go north. So we are spending time on direct investments, trying to look at big licks of big things.

PAUL Nationally or internationally?

ADRIAN Nationally, and we see our competitive advantage here, given our liquidity and our horizon that we can open doors that previously couldn’t be opened.

PAUL Nevertheless your job is to make money with what you're given. Twenty years down the track you're given big money go and make bigger money.

ADRIAN And we are not going to be stepping into investments that we don’t believe are going to provide the returns we need for the risks we're taking.

PAUL Right, and so as far as going into the New Zealand economy is concerned you might be liquefying the New Zealand economy a bit, but you might be causing trouble as well being an elephant, yeah?

ADRIAN Yeah, but you can get into some fantastic investments that previously domestic – you know other normal investors, people without the horizon or the grunt, can't get into.

PAUL Because they can't wait 20 years?

ADRIAN They can't wait 20 years and they can't come in with the scale of dollars needed

PAUL I understand that, but isn’t there a danger too, we go back to that damned old thing of fairness, where you start to pick winners, and so we might start to develop cliques again that we had in New Zealand for so long. I mean you might see one particular wine manufacturer who's actually very good at what marketing or some particular way of making wine, and you invest in there, where does that leave the other fellas? Bit of a worry isn’t it?

ADRIAN Well it's not our worry. Our worry is to find the best possible return and we're very clear on what our investment strategies are. We've got the direct investment one I said, and that’s largely around collective and crown owned or cooperative assets. We've got an expansion capital portfolio, where we're trying to get into mid size New Zealand companies and take them from good to great. We've got an infrastructure portfolio, where we are looking at small to mid size, whether it's utilities, water, energy, this rural.

PAUL Yes you're spread out, it's old fashioned and good yes. Well rural, what about rural investment in New Zealand just quickly.

ADRIAN Yeah well it's not old fashioned, it's direct investment. Rural investment we are very close to appointing an external manager. We do, it's a global portfolio, so we want to be investing internationally and we will be looking for some of that investment to be in New Zealand farms.

PAUL Quick word about South Canterbury Finance, would you be interested in investing in that?

ADRIAN I won’t comment on that.

PAUL Now, of course the government, because we are perceived to be a bit broke at the moment and the government's borrowing lots in order to keep the economy going, 13 billion a year as Bill
English told us. Contributions to the Super Fund have been stopped. Was that a good idea?

ADRIAN Well sitting here as the CEO I was certainly disappointed. I think the one point that people need to understand there is that contributions to us are savings, just as reducing public debt is a form of savings. You can have a mortgage and you can have a pool of financial assets.

PAUL You can have a mortgage, that’s right and you can do a little bit of saving.

ADRIAN Yes.

PAUL So what you're saying is the government could perhaps borrow ten billion offshore for which they're paying interest, give it to you guys and you guys long term, will still make money despite the interest down the bottom end there? You'd still have the ten billion.

ADRIAN Yeah, you still have the ten billion and the investment proposition is the borrowing rate at which government can raise money, which is one of the lowest, it is the lowest in an economy, the borrowing rate. Our challenge is to earn more than that rate with a healthy profit, and we're confident of doing that.

PAUL Were the government wrong to stop the annual contributions to you and to spend them?

ADRIAN The government had their reasons during the middle of a global financial crisis, and our challenge is to convince them that it's well worth continuing to save for the known rising cost of future superannuation.

PAUL So you believe it's not a downside to continue to borrow in order to save a bit?

ADRIAN Not at all.

PAUL Compulsory super, yes or no?

ADRIAN I think there is a role for some form of incentive, whether it's compulsion. Compulsion’s the worst except for the alternatives, when it comes to it, but people are short term in their planning and I think quite naïve often in their investment planning, and so anywhere that people can have money put away for the long term, that’s a good thing.

PAUL Adrian Orr, Chief Executive of the Super Fund, thank you very much for coming in on the programme.

ENDS

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