Investment of the Natural Disaster Fund

Frequently Asked Questions

Why does EQC invest in global equities?

It is prudent to hold assets outside the region that will be directly affected in the event of a major earthquake. If necessary, international equities can be liquidated quickly and, meanwhile, the investment will enhance returns over time.

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Why did EQC not diversify earlier?

Diversification was considered for some time prior to its implementation in 2001. The process required detailed discussions involving EQC, Treasury and advisors before an agreement was reached about the best way to diversify the Natural Disaster Fund.

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Why are there no New Zealand shares in the portfolio?

It is prudent for EQC to hold assets outside the region that will be directly affected by a major natural disaster. In the event of such a disaster New Zealand equities may suffer loss of value and be difficult to sell quickly. EQC's investment is tiny in global terms, but would be significant in the local market.

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Who will manage the overseas shares?

The global equities portfolio has been divided into sub portfolios to spread risk and seek uncorrelated or lowly correlated returns between investment managers. Russell Investment Group (EQC's investment adviser) has extensive manager research capabilities and assists EQC by providing a shortlist of managers for selection. Currently EQC has investment managers for its passive portfolio and for its growth, value and market-neutral active management portfolios.

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In the event of an earthquake, what will be sold first – the shares or the bonds?

It will depend on the size of the earthquake, the number of claims lodged, reinsurance policies, the state of the market and the economic environment at the time. Treasury and the Minister of Finance will assist in determining which assets to liquidate. Meanwhile, the diversified portfolio will provide the country with more options for cash to meet claims payments.

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Is it a wise move to buy shares given their volatility?

EQC's investment in shares is a long-term strategy. On a long-term basis shares perform better than bond investments by a margin often referred to as the equity risk premium. EQC expects its Natural Disaster Fund investments to outperform New Zealand Government stock by at least 1% p.a., over a rolling 10-year period.

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What is EQC’s investment allocation?

EQC has investment targets of 30% to global equities and 70% to New Zealand Government stock and cash (including NZ$250 million of New Zealand registered bank deposits).

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Is the investment allocation likely to change?

Significant changes are unlikely because it is part of a long-term strategy. However, EQC will formally review the investment policies each year within the directive set down by Government.

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Will the shares be selected on a sustainable, responsible investment basis?

EQC's Responsible Investment Policy requires the fund be managed to avoid prejudicing New Zealand’s reputation as a responsible member of the world community. EQC believes in engagement with companies or industries as a primary course of action where a company is not acting in a sustainable, responsible manner.  EQC or its investment managers may engage with companies regarding any such issues.  EQC is a signatory to the United Nations Principles for Responsible Investment (UN PRI).  Information on the UN PRI can be found on their website www.unpri.org.

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What are the investment guidelines for the shares (eg. active/passive, growth/value)?

Currently 40% of EQC’s global equities are passively invested. The rest are managed actively (40% in market neutral, 30% in value and 30% in growth styles). EQC follows international best practice for the appointment of all fund managers.

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Will the foreign currency exposure be hedged back to New Zealand dollars?

EQC's global equities are exposed to significant foreign exchange fluctuations. The investment strategy is set for the long-term to best match the liability profile both before and after natural disasters. Only after a serious natural disaster would EQC have to give consideration to selling equities (other than to rebalance the allocation targets).

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If an earthquake strikes and the international equity market is depressed (like Sept 11) will the Commission still sell the equities?

It will depend on the size of the earthquake, the number of claims lodged, reinsurance policies in place, the state of the market and the economic environment at the time. Claims following a major event are likely to take some time to settle, so the need to draw funds in a ‘depressed’ market environment could possibly be managed.

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While investing in shares over time is a good thing, an earthquake in Wellington could require almost the entire fund – therefore the fund will sell all its shares at once. What are the implications to EQC of this?

Following a disaster claims will be settled over a relatively long period of time, so it is not certain that the equities would need to be sold all at once. Aditionally EQC’s global equities investment, while large in New Zealand, is small in world markets and therefore most stocks would have the liquidity to allow EQC to sell them without reducing the price.

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Where are the funds invested?

The funds are primarily invested in shares from countries that are in the Morgan Stanley Capital (MSCI) World Index and the amount invested will be approximately proportional to the size and value of each country’s stock market.

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