Illiquid assets

GLOBAL INVESTOR 1.15 — 29
Adrian Orr: You have to take your
mind out of an SAA framework. We asked
ourselves, how could we achieve our purpose
in the least-cost, simplest manner?
That means going out and buying listed,
low-cost liquid assets to create what we
call our reference portfolio. It ends up being
effectively 80% equity, 20% fixed income,
globally diversified. And we think of that
reference portfolio as delivering a Treasury
bill plus 2.5% return, on average, over
20 years. We then get out of bed every
morning and say: how can we outperform
that reference portfolio? How can we
add value?
José Antonio Blanco: Adding value
means …?
Adrian Orr: Improving the Sharpe ratio,
a higher return for the same risk, or the
same return for less risk. And that is when
we start actively investing.
Oliver Adler: If you compared your actual
allocations with a typical SAA for a balanced
fund, how marked would the deviations
be, say, in the main asset classes from any
kind of starting or “reference” point?
Adrian Orr: The deviation is quite big,
and has become more visible since about
2007, when we shifted away from our
SAA (we had one once!) and got far more
active and more direct in our investment
strategies. This is also the period of
high growth in the value-add of the fund.
So I would compare our strategy style to
a growth fund’s, not a balanced fund’s.
We have performed exceptionally strongly
over the last five years or so, with
annualized returns anywhere between
17% and 25%.
Oliver Adler: What about illiquid asset
classes such as real estate, which
is probably very local? Or infrastructure,
which everyone is talking about?
Adrian Orr: Many of our illiquid assets
have entered the portfolio as diversifiers
(like timber) or because there was a
significant market mispricing, or a specific
asset mispricing (like Life Insurance Settlements).
Infrastructure has been the real
tough one. Infrastructure assets have been
very sought after; so we rarely see a
mispricing opportunity, and they aren’t as
good a diversifier as people claim unless
they are true infrastructure.
José Antonio Blanco: How do you handle
the delicate question of ethical and
sustainable investment vis-à-vis illiquid
assets?
“We then get out of
bed every morning and
say: how can we
outperform that reference
portfolio? How can
we add value?”
Adrian Orr
Adrian Orr
CEO of the New Zealand Superannuation
Fund, which he joined in February 2007,
coming from the Reserve Bank of New
Zealand where he was Deputy Governor.
He has also held the positions of
Chief Economist at Westpac Banking
Corporation, Chief Manager of the Economics
Department of the Reserve Bank
of New Zealand and Chief Economist at
The National Bank of New Zealand.
Adrian Orr: A big part of our emphasis
on consistency is related to environmental
and social governance issues. We will
not enter into an external manager contract
if we cannot get the transparency we
need and the behaviors and reporting and
performance that we expect.
Oliver Adler: Would you agree that the
set of opportunities for you has diminished
over the last few years generally, if you
look across most investable assets?
Adrian Orr: Very much so. Our big valueadd
came from being able to be a contrarian
investor. Now equity prices are broadly
at fair value, globally. There are still some
opportunities in Europe and Japan, but
that’s where we have lower confidence.
José Antonio Blanco: In principle,
does the current situation favor illiquid
assets relative to traded assets?
Adrian Orr: I would say the illiquidity
premium has declined. There’s so much
global capital chasing illiquid assets,
that we just think, why bother? Why take
on illiquidity and all of the governance
challenges that come with direct investing
when you’re not being rewarded for it?
So we can be patient and await better
opportunities over time.