Should the NZ Super Fund become a passive index fund?

Jim Rose writes:

The New Zealand Superannuation Fund should stop trying to beat the market.

Last week’s spat between Mr English and the Super Fund regarding its chief executive’s pay is another reason why it should be turned into a passive index linked fund.

The Cullen fund attempts to beat the market. To do so it needs some seriously well-paid investment professionals. You do not beat the market on B-team pay rates.

You quickly drop onto the C-list if your portfolio faces constant political interference.

First, it was whether it should invest more in New Zealand. Then the fund should disinvest in politically unpopular shares. Now it should get A-grade results with the B-team pay rates. This will never stop.

Nope.

The taxpayers would be better off if the Super Fund invested in passive index tracker funds.

These funds buy a portfolio with the same weighting as the entire share market and trades as little as possible. This minimises management expenses and trading fees.

Yes, a super fund that is a passive index linked fund would never beat the market, but it would never under-perform it, either, and would be cheaper to run.

An accountant or two would be needed at the Treasury to send and receive the cheques, read the annual reports and audit documents to make sure the money is still there.

You can constantly beat the market, but it is very expensive.

Hedge funds have trouble beating the market for more than a few years in a row after management fees, despite the top hedge fund managers earning more than $1 billion a year. To get on the top 25 list of hedge fund managers you need to earn at least $400 million a year.

That makes whatever the New Zealand super fund is paying its team to beat the market small potatoes.

Makes $1 million look cheap.

Taxpayers contributed $14.88b to the Super Fund from its inception in 2001 to the suspension of contributions in 2009.

In the nine years in which contributions were made, the company tax rate of 28 per cent could have been up to 10 percentage points lower but for those investments. Imagine how much richer New Zealand would be if investors only paid an 18 per cent company tax rate on building their businesses.

The Super Fund must beat the market every single year to make up for the deadweight social cost of its funding through taxes and a premium for the investment risk added to the Crown’s portfolio.

The taxpayer should quit while the going is still good. The Super Fund should become a passive share index tracking fund that minimises management expenses and the risk in the Crown’s portfolio.

An 18% company tax rate would attract lots more investment to NZ, which means more jobs and higher incomes.