NZAS Retirement Fund investment update

The NZAS Retirement Fund uses a wide array of fund managers, and more detail will be available in due course as to specifically how portfolios have been performing recently.  In the meantime we are aware that, while longer term returns are favourable, February was a negative month for most of the fund options, and so far March has been a challenging period, particularly for funds at the “growthier” end of the risk spectrum.
 
After an extended period of positive returns, share markets have been experiencing significant sell-offs in recent weeks as the world grapples with the uncertainty of the spread of Covid-19.  A fall in oil prices following a breakdown in discussions between Russia and Saudi Arabia has added to weak investor sentiment. 
 
Central banks and governments have both enacted and are preparing countermeasures. The Federal Reserve completed an “emergency” cut of 100bps this week and said it would buy government debt to shore up the economy. The Reserve Bank of New Zealand also cut its Official Cash Rate by 75bps with the commitment to keep it at the level for the next twelve months. The rate of new Covid-19 cases has fallen sharply in China with the global growth of new cases now being solely in ex-China. South Korea and Singapore have been quite effective in dealing with new cases, although countries such as Italy have been less effective with the government now taking the extraordinary action of placing the country in lockdown. The biggest “known-unknown” is the spread of the virus in the US and indeed in other countries. 
 
In times of volatility, diversification tends to be an investor’s friend.  This relates to diversification of the asset classes invested in, but also the diversification of the investments within asset classes.  The Retirement Fund invests in a range of sectors and through a number of investment managers with different styles.
 
The negative impact on financial markets has primarily been upon equities.  It is worth noting that all portfolios, and particularly those with a conservative bias, have exposure to high quality fixed interest securities (bonds) and cash. Generally speaking, we have seen the yields on bonds fall markedly, driving bond values up, thereby offsetting portfolio losses in equities.  In addition, portfolios have partial exposure to “real assets” such as listed infrastructure and property, commodities and timber.  These sectors, while under pressure in some cases, typically hold up better than the wider equity market.
 
Active management used within asset classes means that the funds will not simply follow benchmark indices down during soft markets – managers have the ability to provide a buffer through careful security selection. While it is too early to say with clarity how successful these managers have been in recent weeks, many of them employ an investment bias to quality businesses and have been conscious of allocating to companies not trading on stretched valuations.   
 
It is clear that Covid-19 is going to have a significant impact on human health and business activity.  Whether the local and global economies are going to deteriorate, however, is a less pertinent question than how much deterioration is factored into today's asset prices.  To quote prominent investor Jeremy Grantham:  "Be aware that the market does not turn when it sees light at the end of the tunnel. It turns when all looks black, but just a subtle shade less black than the day before".  Predicting the future is highly problematic, but by taking a long-term perspective as an investor, it becomes less critical whether that shade changes tomorrow, next week or in several months' time.
 
In summary, we note the following: 
 

• The portfolios are constructed using a wide range of sources of return and risk. This does not mean that the portfolios are immune from negative market events, but it does mean that they are designed to perform over the longer term and weather rough seas as different market cycles play out. 
   
• Uncertainty over the financial and market impact of the Covid-19 virus remains high.  There is risk of further downside in equity markets in the short term, but we do not recommend significant changes to asset allocations in response.  Material downside to economic growth has been priced-in already, and government policy and central bank responses are in the process of being rolled out.

 
Mercer will continue to monitor economic developments and the market environment.  Should our views change, we will provide further communication.