PSS performance against peers
While long-term returns (10 years) for PSS stack up reasonably well against KiwiSaver schemes, PSS returns lag behind the average for this peer group over the shorter term. Manager performance has played a part, but the principal reason is that we have elected to follow a different investment strategy. While most KiwiSaver schemes have a greater proportion of assets invested in New Zealand shares, we have focused on a more diversified and global portfolio. This helps us reduce risk by spreading funds over a much wider range of investments. If we were to concentrate on the New Zealand market, you can imagine the impact a localised event such as an outbreak of foot and mouth disease would have on returns. Nevertheless, this approach has seen our returns fall behind our KiwiSaver counterparts in recent years.
KiwiSaver schemes continue to benefit from a higher weighting in New Zealand shares. The New Zealand share market has performed particularly well over the last decade – through boom times and more recently as New Zealand weathers the COVID-19 storm. Other components of our diversifying strategy have worked against us in the unique situation that has been brought on by the COVID-19 pandemic. Returns from global listed property and global infrastructure, for example, were expected to help temper any fall in share prices. They have not had this effect during the current downturn. Many of these investments are in businesses that bring people together – think airports, shopping malls and toll roads – and have been particularly affected by lockdowns around the world. At the same time, a collapse in oil prices contributed to a fall in commodity prices to which PSS has a small exposure.
Russell Investments, our investment consultant, will report to the trustee shortly on learnings from this recent downturn. We will consider that information carefully in determining what, if any, changes we will make to our overall investment strategy. Mercer, whose role is to select managers to manage funds within each asset class, monitors the performance of those managers and replaces them if they don’t measure up. Mercer has PSS funds with 45 managers and, in the last year, it changed or terminated contracts with nine managers. You can expect this process, in light of recent events, to be particularly rigorous going forward. For our part, we will continue to engage with the scheme’s investment managers and advisers to make sure the scheme’s overall investment approach and the asset allocation for each fund serves the long-term interests of members.