U.S. equities viewed as a risk by the world's top sovereign wealth fund, leading to a wager on European markets instead
The New Zealand Super Fund, a top-performing sovereign wealth fund, has announced a significant shift in its investment strategy, focusing more on European equities. This move comes as the fund sees more attractive entry points in Europe in the long run compared to the U.S. market.
The fund's decision is part of a "Strategic Tilting" mandate, aimed at reflecting its views on equity market trends. The shift is based on a long-term, ten-year horizon and is not influenced by the short-term impacts of U.S. President Donald Trump's tariffs, which the fund views as largely insignificant for long-term asset owners.
The New Zealand Super Fund's portfolio adjustment is a strategic move towards a more flexible "Total Portfolio" strategy, investing broadly in European equities over U.S. stocks. The fund's managers emphasize that this approach allows them to be more agile, enabling dynamic, risk-based allocation across asset classes.
As of the end of June, the fund was overweight in European equities by 2%, while it was underweight in U.S. equities by 3.5%. This shift is not without reason, as the fund sees European equities as undervalued, trading below their "fair value," according to the New Zealand Super Fund. In contrast, U.S. equities, as measured by the S&P 500, are trading above their "fair value."
The success of the New Zealand Super Fund over the past 10 to 20 years, with an average annual return of over 10%, can be attributed to its willingness to take on high risks that have paid off over the past two decades. However, the fund's chiefs express skepticism towards the U.S. market, expecting U.S. equities to give up their valuation premium at some point in the next decade. They also expect U.S. equities to lose their valuation premium in the medium term.
The New Zealand Super Fund currently employs 79 investment professionals in Auckland, and its total portfolio strategy enables them to focus the fund flexibly. The fund's decision to invest more in European equities is not specific to any European countries, and it emphasizes its commitment to a broad, diversified portfolio.
Inflation risk is expected to rise in the U.S., according to Brad Dunstan, co-investment chief of the New Zealand Super Fund. This factor, along with the perceived overvaluation of U.S. equities, contributes to the fund's decision to shift its focus towards European equities.
The New Zealand Super Fund's strategic move towards European equities underscores its long-term investment strategy and its commitment to finding attractive entry points in global markets. As the fund continues to grow and evolve, it will be interesting to see how its investment decisions shape its future performance.
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