Commentary – Year ended 30 June 2026
Investment Strategy
We are required to invest the Fund on a prudent and commercial basis. In so doing, our investment objective is to maximise returns without undue risk to the Fund as a whole, while managing and administering the Fund in a manner consistent with best practice portfolio management.
We define this objective as being to maximise the Fund’s returns over and above New Zealand Government Bonds (before New Zealand tax), while limiting the chance of under-performing New Zealand Government Bonds over rolling ten-year periods.
We rely primarily on equities to achieve Fund returns greater than New Zealand Government Bonds because, economically and historically, equities are the most reliable source of excess returns over longer time horizons.
We use a notional Reference Portfolio to measure the additional risk and to benchmark the Fund’s performance over interim periods. The Reference Portfolio is a simple, globally diversified portfolio that we expect to meet our long-term investment objective by investing passively in liquid public equity and bond markets at low cost.
The Reference Portfolio comprises 70% global equities, 10% New Zealand equities and 20% global fixed income securities. We invest over 80% of the Fund internationally to avoid concentration of risk in New Zealand assets. Foreign currency exposure is 20% of the Fund on average over time.
We aim to add value against the Reference Portfolio without increasing return volatility, by investing in private equities and insurance-linked assets that provide a more diversified source of return. We seek additional returns through active management of most asset classes. We also dynamically tilt the Fund towards cheaper asset classes and away from more expensive ones, because we believe this pays off over longer periods.
We benchmark all investment decisions against the Reference Portfolio to assess whether they add value in terms of higher returns for equivalent risk, net of investment management fees.
We manage the Fund to have similar risk to the Reference Portfolio whilst being more diversified. When global equities rise strongly, the Fund may underperform the Reference Portfolio but is more likely to outperform bonds, which is the primary goal.
We expect the Reference Portfolio to outperform New Zealand Government Bonds by 0.8% p.a. over the next ten years. That compares with 3.6% pa since the Fund’s inception and 8.4% pa over the last decade.
Chart1setsouttheFund’sassetallocationon30June2026,comparedwiththeReferencePortfolio.
Investment returns
The Fund returned 13.5% in the year to 30 June 2026, net of investment management fees and before tax, far in excess of the 5.6% return of New Zealand Government Bonds but 4.4% behind the Reference Portfolio return of 17.9%.
The Fund’s returns are behind the Reference Portfolio over the last 3 years, but ahead over 5 years. We aim to add approximately 1.0% p.a. on average over ten-year periods from alternative return sources, active managers and the strategic tilting programme. Over the last ten years, the Fund’s return was 0.4%
p.a. below the Reference Portfolio, falling short of our long-term target.
During the year, active bonds and alternative assets contributed positively to the Fund, outperforming their bond benchmark. Listed and especially unlisted equities both underperformed their benchmarks, due to particularly strong growth in listed equities, driven by a small number of very large technology stocks. Unlisted equities tend to underperform during strong growth market conditions, while outperforming during weaker periods. Refer table 2 for more details.
Additionally, the fund’s Dynamic Asset Allocation programme maintained a tilt away from Global Listed Equities, due to the high valuations, which decreased relative performance.
Returns by asset class
Table 2 shows the investment returns by major asset class compared to the relevant asset class benchmark. All returns are annualised, in New Zealand dollars (NZD) before New Zealand tax and after investment management fees.
