New Zealand’s Orr: One of the World’s Most Innovative Investors
The CEO of New Zealand’s sovereign wealth fund has an inclusive approach to managing both people and assets that is proving to be nothing short of impressive.
When Adrian Orr left New Zealand’s central bank in February 2007 to run the country’s fledgling sovereign wealth fund, he knew he was taking a calculated risk. An economist by training, Orr had never led an asset management team or overseen a diversified investment portfolio. As deputy governor and head of financial stability at the Wellington-based Reserve Bank of New Zealand, he’d been closely involved in managing reserves, assessing macroeconomic risk and participating in policy discussions — and he liked the idea of using his skills to help build a lasting institution for New Zealand. But he had no inkling of the size of the challenge he was about to face.
Just six months after Orr arrived at the Auckland headquarters of the New Zealand Superannuation Fund — known locally as NZ Super — the U.S. subprime mortgage crisis hit. As global credit markets began to seize up in late 2007, Orr and his team, then just 16 strong, strove to quickly understand the nature of the crisis and mitigate its impact on the fund’s then-NZ$13.1 billion ($9.2 billion) portfolio. Looking back, the 51-year-old Orr likens the experience to bolting bigger wings on an aircraft in midflight. As CEO of the Guardians of New Zealand Superannuation, as the fund’s management organization is known, he had a duty to keep the fund operating smoothly in the midst of severe macroeconomic turbulence, but he was also working feverishly to hire more staff and strengthen the fund’s portfolio structure at the same time.
“The great thing was that I’d employed half a dozen people out of investment and central banks who were used to liquidity and crisis management,” he says. “Because, as horrific as the experience was, it gave us the opportunity to say to the board: “Look, management needs to be in control of the investment process. We can’t come back to you and ask you how to run this thing in real time.’”
The shift he proposed to the Guardians board was dramatic. Before Orr’s arrival NZ Super had relied on a traditional approach to asset allocation, accumulating different types of investments based on strategic ranges set by the board and leaving key decisions about active investment strategies to external managers. Although many pension and sovereign wealth funds still adhere to that model, Orr questioned it. He wanted to reverse that dynamic, redeem capital and own some of the risks that the sovereign fund was exposed to — only then, he reckoned, would the team be able to freely choose the market exposures it wanted.
To the board’s credit, it was quick to recognize Orr’s need for greater autonomy. Although New Zealand’s Labour government had set up the sovereign wealth fund in 2001 to accumulate resources to help cover future public pension liabilities — called superannuation payments — the organization had been investing only since 2003. Four years on, NZ Super’s board members held tremendous power over day-to-day investment decisions. As contagion spread through the global credit markets, Orr and his team needed the latitude to react quickly. The board acknowledged that the time had come in the fund’s evolution to devolve power to Orr and his staff. Within months, Orr says, the board had agreed to a very different delegation of authority.
In the seven years since then, the former central banker has made the most of his freedom. By recasting the fund’s strategic framework and focusing on diversified risks rather than specific asset classes, Orr has transformed a little-known sovereign wealth fund located at the bottom of the world into a rising star in the ranks of global investment organizations. Although at NZ$25.5 billion the fund is still relatively small, NZ Super is now widely recognized by its peers for its innovative total-portfolio approach, which centers on the use of a customized, passive reference portfolio as an internal benchmark for achieving its goals as cheaply and efficiently as possible. Orr’s team seeks to beat that benchmark by finding investments with superior risk-adjusted returns, using an array of tactics. The strategic tilting program, which NZ Super launched in April 2009, allows the fund to dynamically adjust its exposures to over- or undervalued assets in real time — and invest boldly just as other institutions may be retreating from difficult markets.
Among NZ Super’s peers, only a handful of institutions have adopted a similar approach, including the Canada Pension Plan Investment Board (better known as CPPIB), which also focuses on the risk-return characteristics of investments rather than their asset labels; Singaporean sovereign fund GIC, which announced its shift to a reference portfolio framework last August; and University of Toronto Asset Management Corp., which implemented the portfolio structure in 2012 to manage C$6.6 billion ($6.1 billion) in assets for the school’s endowment, pension funds and other short- and long-term investments. But NZ Super’s resounding commitment to strategic tilting is unusual; it has arguably drawn the most attention and accolades because the team has been so open about its methodology. The program’s performance hasn’t hurt, either. Since NZ Super launched the strategic tilting initiative in April 2009, it has contributed an annualized 146 basis points to the fund’s total performance, or NZ$1.1 billion in added value.
In many regards, NZ Super is now more analogous to a dynamic multiasset manager than to a state-owned pension fund — or even a sovereign wealth fund — given its risk-based, total-portfolio investing style. Although Orr admits that the fund’s recalibrated portfolio strategy took a few years to perfect, the results have been impressive. In the 12-month period ended April 30, 2014, the fund rose by 18.10 percent. Over the past five years, NZ Super has had an annualized return of 17.04 percent. Since the inception of trading in September 2003, the fund has delivered an annualized return of 9.55 percent.
The CEO’s profile is soaring too. In October, Orr was named deputy chairman of the International Forum of Sovereign Wealth Funds (IFSWF), an influential association of the largest state-owned asset managers that meets to exchange views on investing challenges and other issues of common interest. If IFSWF’s members approve, Orr will become the organization’s chairman for a two-year term starting in 2015. In the firmament of the IFSWF’s membership, which includes 26 multibillion-dollar sovereign funds, NZ Super is already known for its willingness to make direct investments and collaborate with like-minded peers on co-investments: Just last year the New Zealand fund revealed that it was working closely with the Abu Dhabi Investment Authority, which oversees an estimated $589 billion for the emirate, and Alberta Investment Management Corp. (AIMCo), which manages C$70 billion for 28 pension and endowment funds based in the Canadian province, to source new late-stage venture capital investments.
“We’ve essentially developed a co-investing protocol with ADIA and AIMCo,” says NZ Super’s head of investment analysis, David Rae, 45. “We’re looking at providing late-stage expansion capital for innovative companies that are beyond the venture capital phase, so most of the technology risk around them is gone, but they’re still too early to IPO.”
By taking on greater responsibility for investing NZ Super’s portfolio, Orr and his team have effectively sidestepped a process that has become a hallmark of many emerging sovereign wealth funds’ structural evolution over the past 15 years. As fiduciaries of state-owned assets, many newly formed sovereign funds rely heavily on the expertise of external asset managers to help them diversify into less-liquid securities and strategies. Although a handful of mature, well-resourced funds, including ADIA, Singapore’s GIC and Malaysia’s Khazanah Nasional, are now running a greater percentage of their own capital in-house (and saving considerable money on managers’ fees), very few young sovereign funds choose to assume that much responsibility. Of the 30 or so funds that have been created since 1999, only a handful beyond New Zealand — including China Investment Corp., Korea Investment Corp. and the Qatar Investment Authority — have prioritized building the structural capacity to run some of their own strategies in-house, according to research by Institutional Investor’s Sovereign Wealth Center.
Orr had no such qualms. Although he may not have followed a traditional career path into asset management, the gregarious, quick-witted New Zealander, who can trace his ancestry back to the Cook Islands in the South Pacific, has a remarkable flair for extracting good ideas from peers and colleagues and putting those concepts into practice. That skill has served him well as he’s undertaken a massive, multiyear reengineering project to better align the fund’s strategic approach with its long-term investment objectives. The key, he says, is making certain that the team works from a shared understanding of NZ Super’s competitive strengths, which he calls its “endowments.” Thanks in large part to its founding legislation, the sovereign fund has a clear and robust governance structure, a long investment horizon, a known liquidity profile, full operational independence, sovereign status and no obvious liabilities: Although contributions were suspended during the financial crisis (and may not resume until the government’s 2019–20 fiscal year), NZ Super is effectively quarantined from any withdrawals until fiscal year 2029–30 at the earliest. Those advantages give Orr and his team a sharp competitive edge in being able to commit long-term capital to prospective deals when the price is right.
“Most investors make a mistake in looking for instant gratification,” he says. “But when asset prices start to look undercooked or overheated, that’s when true long-term investors enter the room.”
The sovereign fund’s meteoric rise to prominence in international markets has everything to do with Orr’s charismatic, can-do leadership style. Somehow the canny economist has turned NZ Super’s competitive weaknesses into strengths. The team uses its physical distance from major financial centers to take a slightly contrarian view of the markets and parlays its small size into an advantage by encouraging its investment staff to work across disciplines in a spirit of self-reliance.
Orr may not have had much choice. In a small country where the sovereign fund’s every move attracts political scrutiny and sparks public discussion, clarity of mission is not just helpful — it’s essential. As a result, Orr has been able to lure talent away from larger organizations to work for one of the smallest, most transparent sovereign wealth funds in the world.
“The thing about Adrian is that he’s a very unusual person,” says Alan Bollard, executive director of the Asia-Pacific Economic Cooperation Secretariat and former governor of the Reserve Bank of New Zealand, who has hired Orr three times over the course of their careers. “He has a good theoretical background — he’s a very talented economist — and yet he’s also very practical.”
Sturdy and thickset, his hands freckled and roughened by decades in the antipodean sun, Orr looks like a man who has spent much of his life outdoors, not hemmed in by an office. Raised in Taupo, a town of 23,000 people in the center of New Zealand’s North Island, Orr was just 13 when his father died. In the following years he and his two older brothers helped their mother run the motel that their father had nearly finished building before his death. He spent his free time playing sports and exploring the volcanic hills surrounding Lake Taupo, one of the largest crater lakes in the world. Orr liked rugby, tennis, golf, swimming and “getting lost in the bush whenever possible,” he says.
As a child Orr was inspired by stories about his enterprising Polynesian grandfather, who grew up on a tiny atoll in the Cook Islands known as Atiu before moving to New Zealand in the 1930s and helping to establish the vast pine tree plantations of Central North Island, including the Kaingaroa Forest, whose management company is now NZ Super’s largest single-asset portfolio holding. Orr earned a bachelor’s of social sciences degree in economics and geography from the University of Waikato, about 76 miles north of Taupo, then left New Zealand to study in the U.K., where he received a master’s in development economics from the University of Leicester, in the East Midlands.
Like many of his expat peers from Australia and New Zealand, Orr initially opted to stay in Europe to launch his career, working as a research associate and tutor at City University London. He returned home in 1988, when Bollard, who was then CEO of Wellington-based nonprofit think tank the New Zealand Institute of Economic Research, hired him as a research economist. Orr subsequently spent three years as an economist at National Bank of New Zealand before going back to Europe to work as an economist for the Paris-based Organization for Economic Cooperation and Development.
But the call of the Southern Hemisphere was strong. In 1995, Orr returned to New Zealand and worked as chief analyst for the New Zealand Treasury before rejoining National Bank of New Zealand as its chief economist in 1996. The next year, Bollard hired him again at New Zealand’s Reserve Bank, this time as chief manager of the economics department, but he left after three years to work in the private sector as Westpac Banking Corp.'s chief economist. Still, Orr couldn’t resist the lure of a fresh challenge when Bollard — who was named governor of the Reserve Bank in September 2002 — contacted him again. The now-seasoned economist rejoined New Zealand’s central bank as deputy governor and head of financial stability in 2003.
Jukka Pihlman, a Finnish economist who now serves as Standard Chartered’s Singapore-based global head of central banks and sovereign wealth funds, worked with Orr while serving as manager of the risk unit at the Reserve Bank. He describes his former colleague as an inspirational manager who likes to challenge members of his team to think outside their own areas of expertise. “It is a fairly small central bank, so I got to be involved in a variety of things, from monetary policy implementation to the investment of reserves,” Pihlman says.
Orr’s management style — and his irrepressible sense of humor — are much in evidence at NZ Super, where he took over as the organization’s second chief executive in 2007. (His predecessor, Paul Costello, had been lured away in 2006 to lead Australia’s nascent sovereign wealth fund, the Future Fund, after three years at the helm of NZ Super.) Pihlman sees Orr’s success at the sovereign wealth fund as directly related to his earlier work at the central bank. Orr has taken some of the skills and management tools that he developed as deputy governor to NZ Super, where the results over the past seven years “have been amazing,” Pihlman says.
“Adrian is the kind of leader who has a strategic vision,” he adds. “He doesn’t necessarily get involved in the nitty-gritty — he is definitely not a micromanager — but he’s very accessible when he needs to be. If you want to discuss micro things with him, he’s more than happy to do that, but he really is a leader with a capital ‘L.’”
One of Orr’s first challenges at NZ Super was the fund’s lack of staffing: The head count was minuscule. Although the CEO has the freedom to build the team he wants, the fund’s remote location hasn’t made the recruiting process easy. Orr has had to work hard to develop a world-class investment team in a country with a population of just 4.4 million — a little more than half the size of New York City’s — spread across 103,500 square miles. Even his longtime friend Neil Williams, who arrived at the fund’s headquarters from London in May 2008, professes not to know how Orr managed to persuade him to leave his job as global head of asset allocation for UBS Global Asset Management and move home. “It’s very far from civilization,” Williams deadpans.
Orr has had considerable success, however, recruiting expats who have wanted to move back to New Zealand without sacrificing their hard-won careers. The idea of recruiting “the green, the gray and the grounded” to remote locations was originally put forward by Jagdeep Bachher, who recently left AIMCo to become CIO of the University of California Board of Regents, and Ashby Monk, executive director of Stanford University’s Global Projects Center (and an Institutional Investor columnist). In 2012, Bachher and Monk wrote about the challenges public entities face when building first-class investment teams in a paper titled “Attracting Talent to the Frontiers of Finance.” Most public institutions in remote places, the authors asserted, had the greatest success recruiting young staff just launching their careers (the green), seasoned professionals looking for a change of location or pace (the gray) and midcareer experts seeking to return home to raise their families (the grounded).
“We have a lot of green and grounded, but the latter probably make up the biggest percentage,” Orr says. “They tend to have ten-plus years of experience offshore and are very happy to be back in New Zealand — but in a global role.”
As part of his recruiting strategy, Orr focused on identifying smart, adaptable employees who could flex their skills on behalf of an increasingly complex and diversified investment portfolio. Although the CEO has managed to recruit investment professionals with years of experience, the backgrounds of many of his leading managers are eclectic. Some have come from central banks, several from Wall Street and a handful from the OECD. Many of them are former colleagues. A few have even come from industry: One of NZ Super’s latest hires, Michael Gleissner, 42, previously worked as CFO of an Auckland-based start-up fiber-optic-cable company, Pacific Fibre; before that he was CFO of global seafood company Sealord Group. He now oversees NZ Super’s domestic direct-investment program.
Orr credits New Zealand with being strong in economic forecasting and banking, particularly trading, but the country doesn’t have a long history of investing. As a consequence, he says, NZ Super simply hasn’t had access to a local pool of specialist asset managers. Outside of the world’s primary financial centers, specialization in finance is a luxury few can afford. But in truth, Orr might not be inclined to hire specialists even if he could find them. As CEO, he places a premium on intellectual flexibility.
“If you look at the experience profiles across the fund, we don’t have the asset manager with 20-plus years in a given discipline,” Orr says. “Twenty-plus years in real estate may be a badge of honor, but that doesn’t tell me anything about what the person is trained in or whether he or she can sell and buy.”
Some of NZ Super’s most successful hires have arrived in Auckland with virtually no experience in asset management. Take the fund’s general manager of investments, Matt Whineray. The 44-year-old New Zealander perfectly fits Bachher and Monk’s description of a “grounded” recruit. After working for a year in Hong Kong for Credit Suisse Group as head of financial sponsor coverage for Asia ex-Japan, Whineray sprang at the chance to move back home with his wife and two young children. He says the opportunity to work for NZ Super also attracted him, because of the special characteristics of the fund: a single client, a single purpose and a longer investment horizon than many publicly owned savings vehicles have.
Whineray, who started at NZ Super in May 2008 (on the same day as Williams) to head private market investments, now oversees all the sovereign fund’s investment activities except portfolio completion, which is overseen by Mark Fennell and includes NZ Super’s arbitrage strategies and treasury functions. Whineray’s remit includes public and private markets, direct investments, strategic tilting, and NZ Super’s research and analysis efforts. “Since we changed from the strategic asset allocation model to the reference portfolio framework about four years ago, we’ve taken all of the team’s asset-class titles away,” he says. “It was quite a deliberate move to reinforce our new structure, but it is challenging. We live in an unanchored world now, without easy reference points.”
Gazing up at the shimmering night sky over New Zealand, it’s easy to lose your bearings if you’re used to the Northern Hemisphere. The North Star, that familiar beacon used by generations of navigators to set their course, is nowhere to be seen. Even the most recognizable constellations, like Orion, appear upside down. To a casual observer, Orr’s very deliberate decision to upend the methodology by which NZ Super invests may seem equally disorienting, but the former central banker is nothing if not systematic and disciplined in his approach. He just doesn’t believe in following the status quo — a quality that Fiona Mackenzie, NZ Super’s head of investments, says is common among her countrymen.
“New Zealanders are quite curious by nature, and we are constantly questioning how to do things,” says the 43-year-old equities expert, who joined NZ Super in 2011 after working as head of markets and strategy at NZX, the New Zealand stock exchange, for two years. “We’ve been able to use our small size to our competitive advantage — because at the end of the day, NZ$25 billion is not a big fund by global standards — and ask, ‘Is there a better way to run this?’”
At the core of NZ Super’s reengineered structure is a passive reference portfolio that now serves as a benchmark for the fund, allowing the team to judge the value added by the fund’s active, opportunistic investment strategies. The reference portfolio reflects the current risk appetite of the institution as a whole and largely consists of highly liquid growth-oriented investments. Any decision the team makes to allocate capital to an active or illiquid investment has to improve the fund’s returns over the long term, reduce risk or both. (For charts detailing NZ Super’s reference and actual portfolios, visit sovereignwealthcenter.com.)
What constitutes an acceptable level of portfolio risk at NZ Super is strongly influenced by the team’s theoretical and empirical belief in fair value and mean reversion. Depending on the severity of a perceived pricing dislocation, Orr and his managers can choose from a range of tactics to take advantage of it, from direct ownership of a given asset to more-flexible, trading-based strategies, such as NZ Super’s strategic tilting program.
“The genesis of strategic tilting is this idea that funds like ours, with the ability to withstand mark-to-market losses, can conduct these sorts of contrarian investing strategies,” says Williams, the former head of strategic tilting, who left NZ Super at the end of May to become head of multiasset and investment solutions at Brisbane, Australia-based QIC. He has been replaced by a former senior analyst on the strategic tilting team, Alex Bacchus, who now leads the program and reports to David Iverson, the 42-year-old head of asset allocation. “By ‘contrarian,’ I just mean heavily valuation-oriented, so we tend to be buying assets on the cheap, when their prices have been falling, and selling assets whose prices have been rising and are overvalued.”
Although strategic tilting, which is analogous to global tactical asset allocation, is hardly a newfangled concept, NZ Super has applied it with conviction. The strategic tilting team has the power to opportunistically adjust the portfolio using an array of securities, including equities (both developed and emerging markets), sovereign bonds, investment-grade credit and a basket of currencies versus the New Zealand dollar. The team is continually refining its approach; last year it incorporated a new portfolio design tool that allows the fund to take a more granular approach to managing and sizing tilt positions.
“Why are we seeing such significant returns? It’s because the markets are so far from fair value that we’ve been able to exploit those discrepancies,” Orr says. “Looking ahead, however, our expected returns from strategic tilting are far more normalized. The U.S. market is looking very close to fair value. The European markets are too, although we think we may still be able to find some juice left in the tank there.”
Strategic tilting is only one of the tools NZ Super uses to outperform its reference portfolio. Over the past few years, Orr and his team have made increasing use of active investment managers, private markets (including direct investments), internally executed arbitrage strategies, currency hedging and portfolio completion. The hurdles are set high. NZ Super simply won’t invest in anything — be it a piece of rural land or a hedge fund — unless its team is confident that the investment will likely outperform the reference portfolio, which serves as a constant reminder that the fund already has a cost-effective, low-risk means of realizing its goals.
Any decision to move away from the reference portfolio has to be worth the price. And because the actual portfolio currently has no fixed allocations, Orr’s investment team has tremendous freedom to research and pursue promising ideas. For the fiscal year ended June 30, 2013, NZ Super’s reference portfolio delivered a return of 18.47 percent; NZ Super’s actual portfolio beat that hurdle by 7.36 percentage points, setting a new record return of 25.83 percent.
“The reference portfolio creates a real investment discipline because you have to look at what the potential investment is really bringing,” says investment analysis chief Rae. “Is it really additive? What sort of market exposures does it bring? Does it actually deliver more than what we can get cheaply and passively from the reference portfolio? Those questions are tremendously important in assessing the relative attractiveness of opportunities.”
Making sense of what constitutes an investment opportunity at NZ Super takes a certain willingness to depart from the standard definitions of common financial terms and see the world from a different point of view. The fund defines an opportunity as a pricing dislocation or inefficiency in the market that lends itself to potential exploitation. Dislocations can be of any duration — either temporary or persistent — and can exist irrespective of asset class, but the team likes to make sure that they fit with the fund’s basic endowments, or strengths. Once the team has identified an appropriate opportunity, it looks for the best access points, such as fund managers, direct investments, derivatives and ETFs.
In the 2012 fiscal year, Orr and his colleagues defined three high-level global trends to use as guideposts in sourcing opportunities: resource sustainability (scientific consensus suggests that current usage patterns are not going to last), emerging-markets segmentation (developing markets offer diversifying benefits and potentially higher growth than OECD countries) and evolving demand patterns (the rising middle classes in Asia and beyond, for example, will likely have a significant impact on the need for goods and services). One such theme, which relates directly to changing demand patterns, is the fund’s focus on the market impact of aging populations in Europe, the U.S. and even New Zealand.
Although many of the fund’s investments take a considerable amount of staff time and research, deals occasionally crop up suddenly and require swift action. At those moments, says Aaron Drew, 42, manager of NZ Super’s macroeconomic strategy (and one of the two original designers of the fund’s strategic tilting program), the work that the group has previously done on the nature of a market opportunity helps give the team the confidence it needs to act with alacrity. “We’d already done a lot of work on the demographics of New Zealand, where aging is an issue — although it’s much less of one here than it is in some other developed countries,” Drew says.
One such potential investment emerged in October, when Retirement Villages New Zealand announced that it planned to sell its 37.7 percent stake in Metlifecare, which owns nearly 4,000 independent units and apartments around Auckland, the Bay of Plenty, Hamilton and Lower North Island. In less than a week, NZ Super announced that it planned to buy a 17 percent stake in publicly traded Metlifecare for NZ$3.53 a share (raising its existing holding to 19.9 percent). At the same time, one of NZ Super’s long-standing infrastructure managers, Wellington-based Infratil, took a 19.9 percent stake. As of May 20, Metlifecare’s share price had increased by 19.3 percent, to NZ$4.21.
Although NZ Super struck the deal independently of Infratil, the two organizations have worked together in the past. Their most successful collaboration was a 50-50 joint venture in 2010 to buy Royal Dutch Shell’s downstream oil-and-gas assets in New Zealand when the global energy company decided to exit the country. With the subsequent backing of Infratil and NZ Super, Shell’s New Zealand retail business, formerly known as Greenstone Energy, undertook a massive rebranding effort as Z Energy and completely revamped 100 of its service stations. In June 2012, NZ Super’s original NZ$209.8 million investment in Z Energy was independently valued at NZ$518.5 million. In August 2013, Infratil and NZ Super decided to list Z Energy, selling 60 percent of the company in an IPO and realizing gross proceeds of NZ$420 million each.
Infratil CEO Marko Bogoievski credits NZ Super’s investment professionals with taking a disciplined, analytical approach to investing while remaining nimble. “They get the balance right between allocating assets and going direct,” he says, “and they’re able to strike quickly when they need to. They can sense a commercial opportunity when it arises.”
Direct investing, which fits well with the organization’s strengths and allows the team to choose the underlying risks it wants exposure to, has played a greater role at the fund since Orr’s arrival. In March 2013, NZ Super hired Nigel Gormly, former general manager and head of global portfolio optimization for Auckland-based dairy company Fonterra Co-operative Group, as head of direct investment; that same month Gleissner joined as general manager of corporate strategy. In January 2014 he stepped into a new role as head of New Zealand direct investment and Gormly’s title changed to head of international direct investment.
“We spend a lot of time looking at different sectors and companies to see if we can shape something, as opposed to just waiting for deals to drop in our lap that some third party is presenting to us,” Gleissner says. “From a New Zealand perspective, that is not where we see deals coming from at all.”
NZ Super doesn’t eschew the use of external advisers and managers, especially when they provide knowledge about esoteric strategies or remote markets that the team finds difficult to access — it just requires them to demonstrate that they know the true source of their own returns. “Managers have to be able to articulate the underlying drivers of the opportunities they’re going to give us,” says head of investments Mackenzie. “If they can’t articulate them, it’s an instant decision for us: ‘You’re out of the game.’”
Orr can be equally blunt, but his infectious sense of humor starts to shine when he talks about the team’s interactions with external managers. “I think we’re one of the most painful customers for a manager to have,” he says. “I think we’re perfectly annoying: We’re blue-chip because we’re a sovereign wealth fund, but we’re small and demanding.”
On a more serious note, Orr emphasizes that NZ Super won’t invest with external managers unless the team feels it has a true relationship with them. That relationship “requires two-way intellectual-property sharing,” he says. “We’ve been put high on the radar with some large external managers because they have an emphasis on two-way knowledge transfer.”
NZ Super gravitates to firms that can provide either great macroeconomic insight to augment the team’s in-house work or granular expertise in niche strategies that require specialist expertise, such as catastrophe bonds. Although a very small percentage of NZ Super’s portfolio is invested with hedge fund firms — only 5.5 percent of the actual portfolio as of June 30, 2013 — NZ Super makes ample use of those connections, leaning on global macro managers like Berkeley Heights, New Jersey-based Blenheim Capital Management; Westport, Connecticut-based Bridgewater Associates; and New York-based D.E. Shaw & Co. to provide analysis and market insight.
“Our opportunistic framework is such that we can do pretty much anything, which is great,” Mackenzie says. “But it also means that we have tremendous choice, so our managers are really important to us. At the end of the day, they’re a lot closer to many of the markets that we’ve been investing in, and in many cases they have deeper teams. If you think about Bridgewater or D.E. Shaw, they have research analysts in the hundreds. We have three.”
In New Zealand intellectual collaboration requires some effort because the country is so geographically isolated. Despite the daunting double-digit flight times to London, New York and Singapore, Orr and his team have worked diligently over the past few years to forge closer connections with their external managers and institutional peers to leverage their knowledge. Their efforts stem from Orr’s fundamental belief in sharing ideas, influenced by his deep familiarity with Maori culture and his interest in promoting social cohesion. In New Zealand an iwi is often translated as a social group analogous to a tribe, and in some senses NZ Super’s 97 employees and seven-member board have formed their own iwi.
“Adrian is really the key to the organization’s culture,” says Ross George, founder and chief executive of Auckland-based private equity firm Direct Capital, which manages NZ$94 million for NZ Super. “He has unique communication skills, and he’s very approachable. I think those qualities permeate the fund’s culture, which is why they have the two-way communication that they do. It is in large part down to him.”
Orr’s inclusive approach to managing the fund extends in several directions. Even though the board has increasingly delegated investment autonomy to the CEO and his team over the past seven years, it still engages closely with them on the fund’s overarching strategy and discusses the investment themes in the actual portfolio. The board is also responsible for setting the desired risk exposures for the reference portfolio. Chairman Gavin Walker explains that as the board’s confidence in the management team’s skills has grown, it has begun to work primarily with the fund’s executives on high-level issues, leaving the day-to-day running of the fund to the staff. Those discussions take place through structured strategic reviews of the portfolio, offsite meetings and an annual educational review, in which the board identifies specific subjects it wants to learn about, with the team’s help, during the fiscal year.
Since December 2012 the board and management team have sought to identify global organizations that could be important sources of knowledge and peer feedback. The IFSWF is one: In November, when the group holds its next annual meeting in Doha, Qatar, Walker plans to attend alongside Orr to lend his support. Each of NZ Super’s directors essentially works with one of the fund’s primary institutional contacts — whether it’s a membership organization like the IFSWF or an international fund manager like Bridgewater — to forge a closer connection. A given board member will more or less partner up with a member of the investment team and shadow him or her with the goal of learning about the specific challenges the team faces in running the portfolio, Walker says.
“Adrian really spends a lot of time ensuring that the board is up to speed in terms of its investment knowledge, particularly around emerging trends in global markets,” the chairman explains. “We want to know what the issues are — and what the risk themes are.”
Over the past two years, Orr and NZ Super’s general manager of investments, Whineray, have worked hard to forge closer relationships with some of the fund’s peers in the sovereign and pension fund communities. The benefits are multiple: The staff wants to be able to share knowledge, secure global and local opportunities for co-investment, discuss best practices and cooperate in areas of shared interest, like responsible investment. “One of the things that Adrian is very good at is making sure that we have doors open with peers around the globe,” says head of investments Mackenzie. “Increasingly, Matt is spending an enormous amount of time fostering those relationships too.”
The creation of the Innovation Alliance in late 2012 with AIMCo and ADIA was a direct result of that effort. In June 2013, NZ Super made its first direct investment as part of the alliance, buying an undisclosed stake in Sunnyvale, California-based Bloom Energy, a maker of power-generation systems and fuel-cell technology, for $50 million. AIMCo began investing in Bloom in early 2011, when the green-energy company had just $60 million in revenue, according to AIMCo CEO Leo de Bever; in 2013, he says, it had $600 million in revenue. This year, he says revenue may touch nearly $1 billion thanks to Bloom’s growing list of clients, which includes such household names as eBay, FedEx Corp., Google and Staples.
NZ Super investment analysis chief Rae sees the alliance as a natural outgrowth of the fund’s preferred collaborative style. “The impetus really came out of three institutions that got together, saw a gap in the capital markets that suited their style of investing and drew on some of the relationships that AIMCo already had with Silicon Valley firms,” he says. “By investing with our peers and sharing the workload, we can execute these things a lot more efficiently.”
Taking a hands-on, asset-class-agnostic approach to investing can be a tremendous challenge. Orr and his investment committee — which includes Mackenzie, Rae and Whineray, among others — have been talking at length about how to allocate risk more efficiently across the fund’s portfolio. The task, as Whineray describes it, requires gaining sufficient clarity about how much exposure the committee is willing to assign a given risk so that individual investment heads can have greater autonomy in their decision making. The process is on some level a natural evolution from the delegation of authority NZ Super achieved in the aftermath of the global financial crisis: With the board now closely focused on identifying thematic priorities for the fund and the investment committee concentrating on translating those themes into opportunities, individual group heads will be freer to make efficient investment decisions.
Risk budgeting is actually part of a larger process, as NZ Super undergoes an annual review to update and build upon its five-year strategic plan across the wider organization. The plan has four key components: pursuing best portfolio practice, collaborating with peers, building and maintaining a strong management team and focusing on efficiency, scalability and innovation.
True to Orr’s style, though, he has lightened what could be a very academic procedural assessment by asking his team to visualize their own islands, identifying where they want to be in five years’ time with respect to their investment activities. Palm trees, pink flamingos and martinis are optional, but imaginative flourishes are welcome.
“We’re spending quite a bit of time on Adrian’s islands at the moment,” Whineray says with a laugh, “but it’s really about prioritization. The danger is that you do everything because you can, but it’s important to think about what’s really important. What do we really want to be good at?”
The team’s current list is undeniably ambitious. But knowing Orr, he will inspire his staff to realize ideas that might seem impossible anywhere but New Zealand.
Loch Adamson is the editorial director of Institutional Investor’s Sovereign Wealth Center.