#Hedgefunds don’t recruit from @NZSuperFund!? @VernonSmall @TaxpayersUnion

30 Mar 2017 Leave a comment

by Jim Rose in financial economics, personnel economics, politics - New Zealand Tags: , , , ,

If the NZ Super Fund was any good at investing, rival investment houses will soon poach their staff to learn the secrets behind their self-proclaimed ability to beat the market.

Investment staff turnover at the NZ Super Fund is so low that you suspect they are overpaid.

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Source: New Zealand Superannuation Fund, information released under the Official Information Act.

The Fund has no information on whether hedge funds head-hunt their staff but I think it might have got out in gossip if someone had a spectacular pay rise at their next job.

Sharp ratios of @NZSuperFund since inception @TaxpayerUnion

28 Mar 2017 Leave a comment

by Jim Rose in financial economics, fiscal policy, politics - New Zealand, public economics Tags: ,

https://youtu.be/sASfjfwkzDs

The Sharp ratio describes how much excess return you are receiving for the extra volatility that you endure for holding a riskier asset. If manager A generates a return of 15% while manager B generates a return of 12%, it would appear that manager A is a better performer. But if manager A took much larger risks than manager B, manager B may be a better risk-adjusted return.

The Sharpe Ratio such as those below of the NZ Superannuation Fund can be used to compare two funds on how much risk a fund had to bear to earn excess return over the risk-free rate.
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Source:New Zealand Superannuation Fund response to Official Information Act request.

The Kidney Machine Gambit & @NZSuperFund @VernonSmall @TaxpayersUnion

27 Mar 2017 Leave a comment

by Jim Rose in fiscal policy, politics - New Zealand, public economics, television Tags: ,

Prime Minister Jim Hacker: “Well, of course we do what we can. There are many calls on the public purse: inner cities, schools, hospitals, kidney machines…”

nzsuperfund contributions as percentage of social spending

98% top US economists disagree @NZSuperFund strategy @VernonSmall @JordNZ

24 Mar 2017 Leave a comment

by Jim Rose in financial economics, fiscal policy, politics - New Zealand, public economics Tags: , , ,

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There is always one. Liran Einav had to be the only economist out of 100 or so top American and European economists who disagreed with the proposition that:

In general, absent any inside information, an equity investor can expect to do better by choosing a well-diversified, low-cost index fund than by picking a few stocks.

The New Zealand Superannuation Fund’s policy of active investing has one supporter out of 100 surveyed by the Initiative for Global Markets. I suppose it is better than none.

The chief executive of the fund quibbles by claiming there is a 3rd way between active and passive investing but there is not as William Sharp explained in his timeless 1991 article, The Arithmetic of Active Management:

    • A passive investor always holds every security from the market, with each represented in the same manner as in the market. Thus if security X represents 3 per cent of the value of the securities in the market, a passive investor’s portfolio will have 3 per cent of its value invested in X. Equivalently, a passive manager will hold the same percentage of the total outstanding amount of each security in the market2.
    • An active investor is one who is not passive. His or her portfolio will differ from that of the passive managers at some or all times. Because active managers usually act on perceptions of mispricing, and because such misperceptions change relatively frequently, such managers tend to trade fairly frequently — hence the term “active.”

An active fund is a fund that is not a passive fund. If you do not own a balanced portfolio of every security in the market, you are an active investor.

The majority of the New Zealand Superannuation fund is passively invested but some of it is not. It is invested in dogs like KiwiBank, in Z service stations and even in some bad Portuguese loans.

It’s "threadbare" to question @NZSuperFund’s investment strategy @TaxpayersUnion

23 Mar 2017 Leave a comment

There really is an issue on which economists are unanimous, a big issue to boot.

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Source: Diversified Investing | IGM Forum.

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Actively-managed mutual funds cannot earn excess returns over index funds because in aggregate they earn the same as index funds, less the difference in cost. This was proposed by Sharpe in his timeless 1991 article, The Arithmetic of Active Management.

Of course, certain definitions of the key terms are necessary. First a market must be selected — the stocks in the S&P 500, for example, or a set of “small” stocks. Then each investor who holds securities from the market must be classified as either active or passive.

  • A passive investor always holds every security from the market, with each represented in the same manner as in the market. Thus if security X represents 3 per cent of the value of the securities in the market, a passive investor’s portfolio will have 3 per cent of its value invested in X. Equivalently, a passive manager will hold the same percentage of the total outstanding amount of each security in the market2.
  • An active investor is one who is not passive. His or her portfolio will differ from that of the passive managers at some or all times. Because active managers usually act on perceptions of mispricing, and because such misperceptions change relatively frequently, such managers tend to trade fairly frequently — hence the term “active.”

… Properly measured, the average actively-managed dollar must underperform the average passively-managed dollar, net of costs. Empirical analyses that appear to refute this principle are guilty of improper measurement.

In 2008, Warren Buffett made a bet of $1 million with Protégé Partners LLC that, including fees, costs and expenses, an S&P 500 index fund would outperform a hand-picked portfolio of hedge funds over the 10 years ending December 31, 2017.

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Image by Jim Rose

Shouldn’t @NZSuperfund be funded by earmarked taxes? @TaxpayersUnion

19 Mar 2017 Leave a comment

by Jim Rose in fiscal policy, macroeconomics, politics - New Zealand, public economics Tags: , , ,

Pre-funding of New Zealand’s old age pension obligations requires contributions to the New Zealand Superannuation Fund now, higher taxes now in return for lower taxes later through the joys of compounding of the returns on the investments. If that is so, when the contributions are not made, the $3 billion in annual taxes should not be collected.

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Source: Andrew Coleman, PAYGO vs SAYGO: Prefunding Government-provided Pensions, Motu Economics and Public Policy 26 Oct 2010.

There should be a separate New Zealand superannuation fund contribution levy that should lapse when contributions are suspended, as they were from 2009, and the pay-outs start after 2036? Otherwise, taxpayers will never see the promised lower taxes in the future. Never?

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Source: Andrew Coleman Mandatory retirement income schemes, saving incentives, and KiwiSaver at http://www.treasury.govt.nz/publications/reviews-consultation/savingsworkinggroup/pdfs/swg-b-m-mris-24dec10.pdf 

Constitutional political economy matters despite the reluctance of most who specialise in Social Security reform to think about that backend public choice risk. Unless there is iron-clad guarantee of lower taxes in the future, the whole deal about pre-funding superannuation pay-outs is a con.

That politicians can pass a law in 2003 to pre-fund old-age pensions 40 years hence and expect the politicians of 2036 and onwards to honour the deal with tax cuts is politically naive.

The benefits and costs of the @NZSuperFund since its inception

17 Aug 2015 Leave a comment

by Jim Rose in applied price theory, applied welfare economics, economic growth, economic history, entrepreneurship, financial economics, fiscal policy, industrial organisation, labour economics, labour supply, macroeconomics, politics - New Zealand, public economics Tags: , , , , , , , , , , , , ,

The New Zealand Superannuation Fund, the sovereign wealth fund part funding New Zealand’s old-age pension from 2029/2030 onwards, has been a bit of a wild ride. Sometimes the earnings of the Fund were well below and sometimes earning well above the long-term bond rate.

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Source: New Zealand Superannuation Fund Annual Report 2014.

Since its inception, the Fund earned an average annual return of 9.78%, which was 5.06% above the long-term bond rate, and 1.03% above its reference portfolio.

No information was given in the annual report of the New Zealand Superannuation Fund on the marginal dead weight cost of the taxes raised to fund the New Zealand Superannuation Fund to see whether there is any net benefit to taxpayers from its establishment and continued operation.

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The New Zealand Government has contributed $14.88 billion to the fund from prior its inception in 2001 to the suspension of contributions in 2009 by the incoming National Party Government.

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Source: New Zealand Treasury.

Over the nine years in which contributions were made, the company tax rate of 28% could have easily been up to 10 percentage points lower.

The New Zealand Treasury estimates that a one percentage point cut in the company tax costs about $220 million in forgone revenue if there are no other changes to the tax system. These are static estimates that do not include any feedback from  greater investment and higher growth.

The New Zealand Superannuation Fund must beat the market every single year to make up for the deadweight cost of its funding, a premium for the investment risk added to the Crown’s portfolio and the cost to New Zealand’s growth rate of higher than otherwise taxes on income, entrepreneurship and investment.

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Source: Abolish the Corporate Income Tax – The New York Times.

Does the NZ Superannuation Fund recover the deadweight cost of the taxes that funded it?

24 Jun 2015 Leave a comment

by Jim Rose in comparative institutional analysis, financial economics, income redistribution, politics - New Zealand, Public Choice, public economics Tags: , , , , , ,

The $30 billion New Zealand Superannuation Fund is the best performing sovereign wealth fund over the past five years, generating returns of more than 17 per cent a year.

Those returns easily beat all other sovereign wealth funds that publish their figures, according to a global study by JP Morgan. In the last three years alone, the fund returned an average of 21 per cent a year.

Good thing to do considering that the default deadweight cost of taxation is put by that Treasury to be 20%:

As a general rule, deadweight losses should be included if they are of sufficient size relative to the overall costs and benefits of the proposal that they are capable of altering the decision as to whether or not to proceed with the proposal.

Having said this, deadweight losses are notoriously difficult to quantify. Estimates vary from 14% up to 50% of the revenue collected.

Treasury suggests a rate of 20% as a default deadweight loss value in the absence of an alternative evidence based value. Thus public expenditures should be multiplied by a factor of 1.2 prior to discounting to incorporate the effects of deadweight loss.

This deadweight cost of taxation includes funds contributed to New Zealand government owned investment funds. In a speech last week, the Super Fund chairman Gavin Walker warned that the recent high returns were unlikely to continue in the long-term:

The last few years are likely to have been among the best years the fund will experience for some time,” he said. “On average and over the long-term we expect to earn the rather less exciting figure of 8 per cent [per annum] – but which will still provide a handsome return to New Zealander stakeholders.

The New Zealand Superannuation Fund must beat the market every single year to make up for the deadweight cost of its funding, the usual interest rate on borrowed funds, a premium for the investment risk added to the Crown’s portfolio and the cost to New Zealand’s growth rate of higher than otherwise taxes on income, entrepreneurship and investment.

Déjà vu all over again: Sovereign Funds, a History of Bad Timing Version

20 Feb 2015 Leave a comment

by Jim Rose in economics of bureaucracy, fisheries economics, rentseeking Tags: , ,

Shara funds under active and passive management

Josh Lerner analysed about 2,600 sovereign fund investments over the last 25 years, to find that:

these funds are “trend chasers” rather than good market timers — they are likely to invest at home when domestic equity prices are higher, and invest abroad when foreign prices are higher. This tendency to shun assets when their prices are low has taken its toll on the returns at these funds…

sovereign fund investments made in a fund’s home country tend to do worse than foreign investments, at least in the short term. Industry price-to-earnings ratios of domestic investments tend to drop in the first year, while international investments have a positive change in the first year. Moreover, when politicians are involved in sovereign funds’ decision-making, more money is funnelled to poorly performing domestic deals

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