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ERIKSENSGLOBAL
Actuaries & Investment Strategists
NORTHLAND REGIONAL COUNCIL
EXTERNALLY MANAGED
INVESTMENT FUNDS
QUARTERLY REPORT 31 DECEMBER 2020
19 JANUARY 2021
STRICTLY PRIVATE & CONFIDENTIAL
Please note the information contained in this document is of a highly commercially sensitive and confidential nature. It is not to be
made public and is only for the use of the Executive and Directors/Trustees of client organisations of EriksensGlobal. This report is
subject to Intellectual Property rights by EriksensGlobal. It is not to be released to any other third parties in any format (including
electronically or verbally), without the express written permission of EriksensGlobal. The information in this report has been
gathered from a variety of sources that we believe to be reliable. Whilst using all reasonable care to obtain this information, we do
not accept any responsibility or liability for errors or omissions.
Auckland Wellington
2 Burns Avenue Takapuna Level 9, 111 The Terrace
ERIKSENSGLOBAL.com PO Box 33-1318 Takapuna 0740
p: +64 9 486 3144
PO Box 10-105 Wellington 6143
p: +64 4 470 6144
auckland@eriksensglobal.com wellington@eriksensglobal.comNorthland Regional Council
Quarterly Report 31 December 2020
CONTENTS
Executive Summary .............................................................................................................................................. 3
Introduction......................................................................................................................................................... 5
Long Term Fund ................................................................................................................................................... 6
Short Term Fund ................................................................................................................................................ 10
Standard Deviation of Returns ............................................................................................................................. 12
Market Performance and Economic Commentary ................................................................................................. 13
Appendix 1: Benchmarks ..................................................................................................................................... 19
Appendix 2: NRC Total Funds Under Management ................................................................................................ 21
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Actuaries & Investment StrategistsNorthland Regional Council
Quarterly Report 31 December 2020
EXECUTIVE SUMMARY
PERFORMANCE
The LTF outperformed against its real objective over all periods. The STF outperformed over all periods
against its real objective and performed 4.5% below the LTF for the year.
1 Month Quarter YTD 1 Year 3 Year 5 Year
% % % % (p.a.) % (p.a.) %
LTF 2.2 5.6 11.0 12.4 8.6 8.2
Objective 0.5 1.5 3.1 6.1 6.1 5.8
Over / Underperformance 1.7 4.1 7.9 6.3 2.5 2.4
LTF Return LTF Objective
14.0
12.4
12.0 11.0
10.0 8.6 8.2
8.0
6.1 6.1 5.8
5.6
6.0
4.0 3.1
2.2
1.5
2.0 0.5
0.0
1 Month % Quarter YTD % 1 Year % 3 Year (p.a.) % 5 Year (p.a.) %
%
1 Month Quarter YTD 1 Year 3 Year 5 Year
% % % % (p.a.) % (p.a.) %
STF 1.4 3.8 7.0 7.9 7.2 7.7
Objective 0.3 0.8 1.6 3.7 4.5 4.8
Over / Underperformance 1.1 3.0 5.4 4.2 2.7 2.9
STF Return STF Objective
9.0
7.9 7.7
8.0 7.2
7.0
7.0
6.0
4.8
5.0 4.5
3.8 3.7
4.0
3.0
2.0 1.4 1.6
0.8
1.0 0.3
0.0
1 Month % Quarter YTD % 1 Year % 3 Year (p.a.) % 5 Year (p.a.) %
%
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Actuaries & Investment StrategistsNorthland Regional Council
Quarterly Report 31 December 2020
PORTFOLIO HIGHLIGHTS
The best performing assets over the quarter were the ones with higher exposures to equity markets, namely
Aspiring, Milford Active Growth and Mint Diversified Growth. The multi-asset income funds supported
returns.
Unhedged assets such as CC No.5 Fund, Schroders and BlackRock benefited from the depreciation of the
NZD against the AUD during the quarter.
Continuity Capital’s PE 2 Fund paid a distribution in December; the PE 4 Fund had a 5 cent capital call which
was partly offset by a distribution; and the PE 5 Fund had a 4 cent capital call. Pioneer Capital III made a
capital call in December.
A new investment in Federation private equity for AU840k occurred, while AU$840k has been invested into
the Nanuk New World Fund as of 13 January 2021.
RECOMMENDATIONS/ACTIONS
Because of record high stock markets and historically low interest rates, financial markets are volatile. We
recommend Council continue to de-risk the LTF by converting the last quarters’ profits into cash as a buffer
against a potential correction.
The allocation to cash assets in the STF is above the allowable range. This higher allocation to cash is
prudent for the time being given the current market environment. We recommend increasing the cash
range in the STF to 20%.
A $600k withdrawal from Blackrock is yet to occur which is due to be invested in Fermat ILS Yield Fund.
ECONOMIC COMMENTS
Equity markets saw a new round of rallies in December backed by the results of the US election and BREXIT
deal. COVID vaccines development improved the market sentiments. The NZD appreciated against all main
currencies and depreciated against the AUD which was positive to unhedged returns.
We expect the low interest rate environment to remain for the short to medium term which will support
asset prices. However the markets will remain volatile and geopolitical risks are high.
There is potential for a shift from growth to value because of overpriced growth stocks.
The importance of ESG factors has gained pace in recent years and will be a key element for Eriksens and our
clients going forward. We are investing time and resources into researching and understanding the
opportunities and challenges in this investment space.
We see further political and social unrest in the US and other countries this year.
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Actuaries & Investment StrategistsNorthland Regional Council
Quarterly Report 31 December 2020
INTRODUCTION
This is the quarterly investment report to the Northland Regional Council by EriksensGlobal and is based on
the draft Statement of Investment Policy and Objectives dated 1 January 2021.
Investment Objective
(Net of Fees)
Long Term Fund
NZ CPI (rolling over three years) plus 4.5% per annum
Short Term Fund
90-day Bank Bill Index plus 3% per annum
The NZ CPI (rolling over three years) as at September 2020 was 1.6% per annum. The Fund objectives for
shorter time periods have been amended to reflect the actual CPI change for that period (where possible).
All performance figures are time-weighted returns shown net of fees, gross of tax and include currency gains
and losses associated with conversion back to NZD. Past performance is not necessarily a guarantee of
future performance and care should be exercised not to make decisions based on past performance only.
The returns have been calculated from monthly data provided by each asset manager. There may therefore
be a discrepancy if the amounts invested in a particular asset have changed during the month.
Each Fund is invested in a multi-manager structure, with the managed products holding their own individual
mandate (see Appendix 1).
Underlying Fund allocations are categorised as follows:
• Growth assets: global shares, Australasian shares, property and Australasian private equity
• Income assets: global bonds, Australasian bonds and other debt instruments
• Cash assets: cash or short duration bonds
The financial year-end for the Fund is 30 June, thus year-to-date returns are for six months.
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Actuaries & Investment StrategistsNorthland Regional Council
Quarterly Report 31 December 2020
LONG TERM FUND
PERFORMANCE SUMMARY
1 Month Quarter YTD 1 Year 3 Year 5 Year
Asset
% % % % (p.a.) % (p.a.) %
Diversified Growth
Aspiring 5.1 11.4 16.9 12.8 9.7
Benchmark 0.5 1.4 2.8 5.6 5.6
Over / Underperformance 4.6 10.0 14.1 7.2 4.1
Castle Point 5 Oceans 1.7 5.2 8.0 9.6 6.1
Benchmark 0.2 0.7 1.5 3.3
Over / Underperformance 1.5 4.5 6.5 6.3
Milford Active Growth 2.0 6.8 12.8 10.4 10.4 10.4
Benchmark 0.8 2.4 4.9 10.0 10.0 10.0
Over / Underperformance 1.2 4.4 7.9 0.4 0.4 0.4
Mint Diversified Growth 2.6 7.2 15.5 18.2
Benchmark 0.5 1.5 2.8
Over / Underperformance 2.1 5.7 12.7
Schroders RRF 4.5 5.3 7.3 9.0 3.7 5.4
Benchmark 0.5 1.6 3.3 6.5 6.5 6.3
Over / Underperformance 4.0 3.7 4.0 2.5 (2.8) (0.9)
Global Equity
T. Rowe Price Global Equity Growth 2.8 7.9 16.9 33.5
Benchmark 2.1 5.3 10.9 9.0
Over / Underperformance 0.7 2.6 6.0 24.5
Private Equity
Continuity Capital No.2 2.2 4.0 24.6 24.3
Benchmark 1.2 3.6 7.2 15.0
Over / Underperformance 1.0 0.4 17.4 9.3
Continuity Capital No.4 1.3 3.3 22.9 9.9
Benchmark 1.2 3.6 7.2 15.0
Over / Underperformance 0.1 (0.3) 15.7 (5.1)
Continuity Capital No.5 6.6 2.3 3.1
Benchmark 1.2 3.6 7.2
Over / Underperformance 5.4 (1.3) (4.1)
Direct Capital VI 0.0 -2.0
Benchmark 0.9 2.9
Over / Underperformance (0.9) (4.9)
Federation Alternative Fund 0.0
Benchmark 1.2
Over / Underperformance (1.2)
MLC PE II -0.6 3.3 15.7 23.1 12.8
Benchmark 1.2 3.6 7.2 15.0 15.0
Over / Underperformance (1.8) (0.3) 8.5 8.1 (2.2)
PCP III 0.0 0.0 -0.3 38.0 27.3
Benchmark 0.6 1.9 3.9 8.0 8.0
Over / Underperformance (0.6) (1.9) (4.2) 30.0 19.3
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Actuaries & Investment StrategistsNorthland Regional Council
Quarterly Report 31 December 2020
Asset 1 Month Quarter YTD 1 Year 3 Year 5 Year
% % % % (p.a.) % (p.a.) %
Diversified Income
BlackRock FIGO 3.2 1.8 5.8 8.2 2.8
Benchmark 0.3 1.0 2.0 4.4 5.3
Over / Underperformance 2.9 0.8 3.8 3.8 (2.5)
Harbour Income 1.9 5.8 9.3 7.2 7.3 6.7
Benchmark 0.3 0.9 1.8 3.8 4.6 4.5
Over / Underperformance 1.6 4.9 7.5 3.4 2.7 2.2
Milford Diversified Income 1.9 5.8 8.4 4.4 7.1 8.4
Benchmark 0.2 0.6 1.3 2.8 3.6 4.0
Over / Underperformance 1.7 5.2 7.1 1.6 3.5 4.4
Mint Diversified Income 1.3 4.1 7.4 6.4 6.1 5.8
Benchmark 0.4 1.1 2.3 4.6 4.6 4.4
Over / Underperformance 0.9 3.0 5.1 1.8 1.5 1.4
Total Fund 2.2 5.6 11.0 12.4 8.6 8.2
Fund Objective 0.5 1.5 3.1 6.1 6.1 5.8
Over / Underperformance 1.7 4.1 7.9 6.3 2.5 2.4
Legend: Red = -2% or below; Amber = greater than -2% but less than 0%; Green = 0% or above
CONTINUITY CAPITAL PE FUND NO.2 (HISTORICAL RETURN)
The table below shows the returns of Continuity Capital No.2, including the period before it was transferred
from the old PRF to the LTF.
Asset 1 Month Quarter YTD 1 Year 3 Year
% % % % % p.a.
Continuity Capital PE Fund No.2 2.2 4.0 24.6 24.3 16.1
Benchmark 1.2 3.6 7.2 15.0 15.0
Value Added 1.0 0.4 17.4 9.3 1.1
Legend: Red = -2% or below; Amber = greater than -2% but less than 0%; Green = 0% or above
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Actuaries & Investment StrategistsNorthland Regional Council
Quarterly Report 31 December 2020
AUSTRALIAN DOLLAR-DENOMINATED FUND RETURNS
The following table shows the movements of the AUD/NZD cross rate which affect the unhedged Schroders,
MLC, BlackRock, Continuity No.5, and Federation returns. A negative change in the cross rate is beneficial to
the unhedged NZD return, while a positive change is detrimental to the unhedged NZD return.
1 Month Quarter YTD 1 Year 3 Year 5 Year
% % % % (p.a.) % (p.a.) %
AUD/NZD (2.2) 1.2 (0.2) (2.8) 0.9 (0.2)
Schroders RRF + 5% (NZD) 4.5 5.3 7.3 9.0 3.7 5.4
Benchmark 0.5 1.6 3.3 6.5 6.5 6.3
Over / Underperformance 4.0 3.7 4.0 2.5 (2.8) (0.9)
Schroders RRF + 5% (AUD) 1.2 5.4 6.0 4.8 4.2 4.9
Benchmark 0.5 1.6 3.3 6.5 6.5 6.3
Over / Underperformance 0.7 3.8 2.7 (1.7) (2.3) (1.4)
MLC PE II (NZD) (0.6) 3.3 15.7 23.1
Benchmark 1.2 3.6 7.2 15.0
Over / Underperformance (1.8) (0.3) 8.5 8.1
MLC PE II (AUD) (2.8) 4.6 15.6 19.9
Benchmark 1.2 3.6 7.2 15.0
Over / Underperformance (4.0) 1.0 8.4 4.9
BlackRock FIGO (NZD) 3.2 1.8 5.8 8.2 2.8
Benchmark 0.3 1.0 2.0 4.4 5.3
Over / Underperformance 2.9 0.8 3.8 3.8 (2.5)
BlackRock FIGO (AUD) 0.9 3.0 5.6 5.2 3.7
Benchmark 0.3 1.0 2.0 4.4 5.3
Over / Underperformance 0.6 2.0 3.6 0.8 (1.6)
Continuity Capital No.5 (NZD) 6.6 2.3 3.1
Benchmark 1.2 3.6 7.2
Over / Underperformance 5.4 (1.3) (4.1)
Continuity Capital No.5 (AUD) 4.6 3.8 3.4
Benchmark 1.2 3.6 7.2
Over / Underperformance 3.4 0.2 (3.8)
Federation Alternative (NZD) 0.0
Benchmark 1.2
Over / Underperformance (1.2)
Federation Alternative (AUD) 0.0
Benchmark 1.2
Over / Underperformance (1.2)
Legend: Red = -2% or below; Amber = greater than -2% but less than 0%; Green = 0% or above
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Actuaries & Investment StrategistsNorthland Regional Council
Quarterly Report 31 December 2020
LTF OVERALL FUND ASSET ALLOCATION
Overall Fund Asset Allocation Market Value Target Target Range Status
$ % % %
Growth Assets 23,997,848 59.5 67 50 - 85
Diversified Growth 14,582,856 36.2 37 25 - 70
Aspiring 3,922,120 9.7 10 5 - 15
Castle Point 5 Oceans 5,212,948 12.9 15 10 - 20
Milford Active Growth 1,971,067 4.9 10 5 - 15
Mint Diversified Growth 2,259,596 5.6 5 0 - 10
Schroders Real Return Fund + 5% 1,217,125 3.0 2 0 - 10
Global Equity 3,693,597 9.2 7 5 - 20
Nanuk New World 0 0.0 2 0-5
T. Rowe Price Global Equity Growth 3,693,597 9.2 10 0 - 15
Private Equity 5,721,395 14.2 18 0 - 35
Continuity Capital PE Fund No.2 LP 1,338,057 3.3 3 0-8
Continuity Capital PE Fund No.4 LP 573,934 1.4 3 0-8
Continuity Capital PE Fund No.5 LP 709,670 1.8 3 0-8
Direct Capital VI 265,609 0.7 3 0-8
Federation Alternative 900,259 2.2 2 0-5
MLC PE II 1,055,875 2.6 2 0-5
PCP III 877,991 2.2 2 0-5
Income Assets 16,341,147 40.5 31 15 - 50
Diversified Income 15,440,888 38.3 31 15 - 45
BlackRock FIGO 1,250,177 3.1 2 0 - 10
Harbour Income 3,498,182 8.7 9 0 - 15
Milford Diversified Income 4,893,184 12.1 10 0 - 15
Mint Diversified Income 5,799,345 14.4 10 0 - 15
Cash 900,259 2.2 0 0-5
Self-Managed 900,259 2.2 0 0-5
Total Assets 40,338,995 100.0
LTF UNDERLYING FUND ASSET ALLOCATION
70.0
Growth Assets, 59.7
60.0
New Zealand Assets,
50.0 47.4
40.0 Global Assets, 37.4
Income Assets, 30.9
30.0
20.0
Australian Assets, 15.2
Cash Assets, 9.4
10.0
0.0
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Actuaries & Investment StrategistsNorthland Regional Council
Quarterly Report 31 December 2020
SHORT TERM FUND
PERFORMANCE SUMMARY
Performance Summary 1 Month Quarter YTD 1 Year 3 Year 5 Year
% % % % (p.a.) % (p.a.) %
Diversified Growth
Castle Point 5 Oceans 1.7 4.3 7.1 8.4 5.1
Benchmark 0.2 0.7 1.5 3.3 4.1
Value Added 1.5 3.6 5.6 5.1 1.0
Milford Active Growth 2.0 7.4 13.7 11.3
Benchmark 0.8 2.4 4.9 10.0
Over / Underperformance 1.2 5.0 8.8 1.3
Mint Diversified Growth 2.6 4.2 12.3
Benchmark 0.5 1.5 1.5
Over / Underperformance 2.1 2.7 10.8
Diversified Income
Harbour Income 1.9 5.0 8.9 8.7
Benchmark 0.3 0.9 1.8 3.8
Value Added 1.6 4.1 7.1 4.9
Milford Diversified Income 1.9 5.1 7.9 3.9 6.8 8.2
Benchmark 0.2 0.6 1.3 2.8 3.6 4.0
Over / Underperformance 1.7 4.5 6.6 1.1 3.2 4.2
Mint Diversified Income 1.2 3.9 7.3 7.2 6.1 5.9
Benchmark 0.4 1.1 2.3 4.6 4.6 4.7
Value Added 0.8 2.8 5.0 2.6 1.5 1.2
QuayStreet Income 0.9 2.0 4.1 3.9 5.2 5.5
Benchmark 0.2 0.5 1.0 2.3 3.1
Value Added 0.7 1.5 3.1 1.6 2.1
Cash
Self-Managed 0.0 0.1 0.3
Benchmark 0.0 0.1 0.0
Value Added 0.0 0.0 0.3
Total Fund 1.4 3.8 7.0 7.9 7.2 7.7
Fund Objective 0.3 0.8 1.6 3.7 4.5 4.8
Value Added 1.1 3.0 5.4 4.2 2.7 2.9
Legend: Red = -2% or below; Amber = greater than -2% but less than 0%; Green = 0% or above
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Actuaries & Investment StrategistsNorthland Regional Council
Quarterly Report 31 December 2020
STF OVERALL FUND ASSET ALLOCATION
Overall Fund Asset Allocation Market Value Target Target Ranges Status
$ % % %
Growth Assets 5,836,947 24.7 20 0 - 40
Diversified Growth 5,836,947 24.7 20 0 - 40
Castle Point 5 Oceans 2,779,189 11.7 10 0 - 20
Milford Active Growth 1,398,187 5.9 5 0 - 20
Mint Diversified Growth 1,659,571 7.0 5 0 - 20
Income Assets 17,837,613 75.3 80 60 - 100
Diversified Income 14,818,945 62.6 80 60 - 100
Harbour Income 4,005,223 16.9 20 0 - 30
Milford Diversified Income 3,611,028 15.3 20 0 - 30
Mint Diversified Income 3,756,696 15.9 20 0 - 30
QuayStreet Income 3,445,998 14.6 20 0 - 30
Cash 3,018,668 12.8 0 0-5
Self-Managed 3,018,668 12.8 0 0-5
Total Assets 23,674,560 100.0
The allocation to cash is above the allowable range, though this is prudent for the time being given the
current market environment.
STF UNDERLYING FUND ASSET ALLOCATION
70.0
New Zealand Assets,
62.2
60.0
50.0
Income Assets, 44.7
40.0
Growth Assets, 33.9
30.0
Global Assets, 23.3
Cash Assets, 21.5
20.0
Australian Assets, 14.5
10.0
0.0
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Actuaries & Investment StrategistsNorthland Regional Council
Quarterly Report 31 December 2020
STANDARD DEVIATION OF RETURNS
At the request of the Investment Sub-Committee we have included the table below showing the standard
deviation of returns for each NRC Fund. We have also included two Morningstar Category Benchmarks and
the NZX50 Index to provide some context.
The Morningstar category benchmarks are defined as below:
• The Multisector Balanced Category consists of funds that invest in a number of sectors and have 41% to
60% of their assets in growth sectors. These are typically defined as equity and property asset classes.
• The Multisector Moderate Category consists of funds that invest in a number of sectors and have
between 21% and 40% of their investments exposed to the growth sectors. These are typically defined
as equity and property asset classes.
Standard deviation is a measure of variation around an average return. For example, if a fund returned 10%
per annum on average over the past three years with a standard deviation of 3%, this means the annual
return could have been between 7% and 13%. The higher the standard deviation, the wider the range in
returns.
The investment industry has traditionally used standard deviation as one measure of risk. However, risk is
complex and has many different sides to it so cannot be condensed into one measure. The use of standard
deviation as a measure of risk can give a false impression of confidence, or a false impression of fear. The
statistic does not tell us whether the variation in returns is more on the upside, or more on the downside.
Neither does it tell us how frequent large falls may occur. We note that the figures below are based on past
returns and are not a reliable indicator of the distribution of future returns. The figures are annualised and
have been calculated using monthly returns.
Standard Deviation of Returns 1 Year 3 Year
% (p.a.) %
LTF 10.6 6.6
STF 5.4 4.1
NZ Multi-Sector Balanced 5.3 5.2
NZ Multi-Sector Moderate 6.7 4.7
S&P/NZX 50 18.8 12.7
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Quarterly Report 31 December 2020
MARKET PERFORMANCE AND ECONOMIC COMMENTARY
MARKET PERFORMANCE
Index Level/ 1 Month Quarter 1 Year
Index
Price % % %
Global Equities
MSCI Emerging Markets 744.41 6.1 16.0 19.1
S&P 500 (US) 3756.07 3.7 11.7 16.3
Nikkei 225 (Japan) 27444.17 3.8 18.4 16.0
FTSE 100 (UK) 6460.52 3.1 10.1 -14.3
DAX (Germany) 13718.78 3.2 7.5 3.5
CAC 40 (France) 5551.41 0.6 15.6 -7.1
Trans-Tasman Equities
S&P/NZX 50 13091.64 2.5 11.4 13.9
S&P/ASX 300 72901.02 1.3 13.8 1.7
Bonds
S&P/NZX NZ Govt Stock 1933.54 -0.9 -2.8 5.4
S&P/NZX A Grade Corporate 5970.97 -0.3 -1.0 5.4
BBgBarc Global Aggregate Hdg NZD 431.18 0.3 0.8 5.4
FTSE WGBI Hdg NZD 3746.90 0.1 0.2 6.1
Oil
West Texas Intermediate Crude 48.52 7.0 20.6 -20.5
Brent Crude 51.17 8.5 25.0 -23.0
NZD Foreign Exchange
AUD 0.9331 -2.2 1.2 -2.8
EUR 0.5885 0.2 4.4 -2.1
GBP 0.5267 0.1 3.0 3.4
JPY 74.3364 1.4 6.6 1.4
CNY 4.6776 1.2 4.3 -0.5
USD 0.7200 2.4 8.9 6.7
Source: Nikko
Executive summary:
• Oil has almost recovered to pre COVID levels (about $60 per barrel)
• NZ dollar weakens against AUD, positive for unhedged returns
• Despite the pandemic crash, global equity markets (ex Europe & Australia) have risen strongly
• Bond markets drop reflecting the current unattractiveness of the asset class
• Watch for increasing interest rates and inflation
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Quarterly Report 31 December 2020
ECONOMIC COMMENTARY
GENERAL
Most assets are at extremely high, if not bubble-like prices because of the amount of quantitative easing
both monetary by Central banks or fiscal by Governments trying to ease COVID disruptions on their citizens.
Estimated fiscal and monetary support in key economies, 2020 and 2021
Source: BlackRock
FINANCIAL MARKETS
Markets followed the November trend with low volatility. Positive news coming from vaccine manufacturers
and government support measures added to positive market sentiment. Bond yields continued to be low
however they reached their highest levels in months with the benchmark 10-year US Treasury note reaching
0.93%. Equities continue to get more expensive.
Our view is that asset prices continue to be supported by a low interest rate environment. There has been
murmur of the NZ OCR not going to further lows because local economic activity has been remarkably better
than forecasts back in March. However, the generally low environment may remain for the foreseeable
future which will support continued equity market rallies and general asset inflation.
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Actuaries & Investment StrategistsNorthland Regional Council
Quarterly Report 31 December 2020
There is potential for shift from growth to value because of the overpriced growth stocks have led to
potentially under-priced value stocks. Growth investing has dominated the last decade due to low inflation,
economic growth, and interest rates, coupled with significant performance of technology growth stocks.
However, the shift will not be at the expense of growth, as passive and retail investors tend not to invest in
value and they are a growing segment of the market.
Source: MorningStar
Alternatively, value or dividend paying stocks could substitute low yielding high risk bonds as a safer
investment for institutions. Normally, bonds are less risky and pay less than equities. However, our view is
that bonds now are riskier than equities whilst continuing to pay less. With the combination of the US dollar
weakening, probable inflation increasing in the next one to two years, the distortion of returns above the
‘risk-free’ rate will continue, resulting in asset prices continuing to be disproportionately higher than we
expect. Until the bubble bursts perhaps?
Other alternative investment spaces that Eriksens is recommending are:
• Private equity and private debt. Far less risky asset classes than they are given credit for because
they are not as susceptible to listed market volatility.
• Dividend stocks including energy companies, provide more robust income sources compared to
bonds.
• Insurance linked securities provide a nearly uncorrelated substitute to public markets yet provide
traditional bond like returns.
• Sustainable investment managers and funds are more attractive than ever before as the financial
market is recognising the importance that these investments provide the greater good of our society
(and of course the added returns they are providing).
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Actuaries & Investment StrategistsNorthland Regional Council
Quarterly Report 31 December 2020
The importance of Environmental, Social and Governance investing has gained pace over the last few years
and will be a key element for Eriksens and our clients this year. This theme is confirmed with the Biden
administration aiming to improve regulations for sustainable investing. The United States Forum for
Sustainable and Responsible Investment reported that total US-domiciled assets under management
employing ESG investing strategies increased 42 percent over the past two years, to $17 trillion in 2020 up
from $12 trillion at the start of 2018. These numbers represent 33% of all US assets under professional
management.
How we look to advise our clients’ investment strategies is inextricably linked to their values and how we can
reflect that in their portfolio. It is pleasing to see support for ESG on the biggest political stage, but not
surprising given the increasing assets devoted to sustainable investing over the last six years.
Source: Forbes.com
GEOPOLITICAL
Geopolitical risks are high; however, US-China tensions are continuing with a recent ban of three Chinese
telecom companies from trading on the NYSE. China and Australia relations are still strained with continuing
tariffs imposed on Australian wines and low buying volumes for cotton, meat and coal.
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Actuaries & Investment StrategistsNorthland Regional Council
Quarterly Report 31 December 2020
The transition from Trump to Biden will continue to open the cracks and deep divisions among American
people. The Republican party has become splintered and the long-term impacts of the Trump
administration on democratic integrity will be felt for years to come. Compared to the Chinese who exude
stability over time, albeit with authoritarian means, will find a competitive advantage in the global
marketplace.
With a blue wave win after successful Democrat wins in Georgia, Biden will have more ease to implement
the changes he promised during the campaign. Albeit, he may start to feel pressure form the far left group of
his party in Sanders and Ocasio-Cortez to introduce more socialist measures that could further divide the
already broken nation. We hold that potential higher corporate tax rates would be a small headwind to
financial markets but will not cause significant effect. Markets have responded well in January to the
Democratic wins in Georgia.
The UK-EU post-BREXIT deal was treated as a Christmas gift but had been priced into the markets since the
start of the year, whether or not a deal was to be made. The main outcome is that there will not be taxes or
tariffs on the goods coming from the EU to the UK and vice versa, which dispelled the fear of more expensive
life for the UK citizens.
SOCIAL UNREST
The US democracy appears to be teetering on the brink of a crisis. There is an evident move towards further
political and social unrest in the US. Nobel winning economist, Paul Krugman, agrees with us that the US is
on its way to being an oligarchy. With more families transferring wealth to those who have not earned it, we
see this as a trend becoming more apparent over time. Since the low interest rate environment is here for
the medium term, it will continue to support higher equity valuations and those who already have wealth
invested prudently. In our view this widening of the gap between rich and poor is contributing to social
tensions.
COVID-19 PROGRESS?
The current economic crisis is different from historic downturns. Usually, it is related to a bubble, debt,
supply or commodity related shock, however the current economic pain came almost overnight as a result of
a virus that is external to the economy. Our view is that the economic recovery is highly dependent on
progress against the disease and interim fiscal expenditures.
New Zealand, compared to the rest of the world, has done a good job thus far in supporting these measures.
However, with 2021 upon us and little progress seen overseas in public health responses, vaccine
distribution and proven widespread immunity, we need to remain vigilant in our local virus response and
understand what remaining economic tools we have left should a further March 2020 shock come again.
We expect there will be a correction in 2021, but does more quantitative easing increase inflation risk to
undo all our good work so far? Thank goodness we are not Grant Robertson. Our best economic tool is not
financial, it is border control, distribution logistics and having open communication lines with our
neighbouring countries.
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Actuaries & Investment StrategistsNorthland Regional Council
Quarterly Report 31 December 2020
MARKETS OUTLOOK
Good Normal Bad Now
Positive
Flat
Negative
• A bigger probability of getting a good return…
• …But an even bigger chance of getting a negative or very low return.
• Unlikely that average returns will be made.
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Actuaries & Investment StrategistsNorthland Regional Council
Quarterly Report 31 December 2020
APPENDIX 1: BENCHMARKS
LONG TERM FUND
Asset Benchmark
Growth Assets
Diversified Growth
Aspiring NZ CPI + 4% p.a.
Castle Point 5 Oceans NZ OCR + 3% p.a.
Milford Active Growth 10% p.a.
Mint Diversified Growth NZ CPI + 4.5% p.a.
Schroders Real Return Fund + 5% Australian CPI (trimmed mean) + 5% p.a.
Global Equity
Nanuk New World MSCI All Country World Index
T. Rowe Price Global Equity Growth MSCI All Country World Index
Private Equity
Continuity Capital PE Fund No.2 LP 15% p.a.
Continuity Capital PE Fund No.4 LP 15% p.a.
Continuity Capital PE Fund No.5 LP 15% p.a.
Direct Capital VI 12% p.a.
Federation Alternative 16% p.a.
MLC PE II 15% p.a.
PCP III 8% p.a.
Income Assets
Diversified Income
BlackRock FIGO Bloomberg AusBond Bank Bill Index + 4% - 6% p.a. (we use 4%)
Harbour Income NZ OCR + 3.5% p.a.
Milford Diversified Income NZ OCR + 2.5% p.a.
Mint Diversified Income NZ CPI + 3% p.a.
Total Assets NZ CPI + 4.5% p.a.
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Actuaries & Investment StrategistsNorthland Regional Council
Quarterly Report 31 December 2020
SHORT TERM FUND
Asset Benchmark
Growth Assets
Diversified Growth
Castle Point 5 Oceans NZ OCR + 3% p.a.
Milford Active Growth 10% p.a.
Mint Diversified Growth NZ CPI + 4.5% p.a.
Income Assets
Diversified Income
Harbour Income NZ OCR + 3.5% p.a.
Milford Diversified Income NZ OCR + 2.5% p.a.
Mint Diversified Income NZ CPI + 3% p.a.
QuayStreet Income NZ OCR + 2% p.a.
Total Assets 90-day Bank Bill Index plus 3% p.a.
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Actuaries & Investment StrategistsNorthland Regional Council
Quarterly Report 31 December 2020
APPENDIX 2: NRC TOTAL FUNDS UNDER M ANAGEMENT
FUNDS UNDER MANAGEMENT: BREAKDOWN
Manager Fund LTF STF NRC Total NRC Manager
$ $ FUM $ % of Total FUM
Aspiring Aspiring 3,922,120 3,922,120 6.1
BlackRock FIGO 1,250,177 1,250,177 2.0
Castle Point 5 Oceans 5,212,948 2,779,189 7,992,136 12.5
Continuity Capital No.2 1,338,057 1,338,057
No.4 573,934 573,934 4.1
No.5 709,670 709,670
Direct Capital DC VI 265,609 265,609 0.4
Federation Alternative 900,259 900,259 1.4
Harbour Income 3,498,182 4,005,223 7,503,405 11.7
Milford Active Growth 1,971,067 1,398,187 3,369,255
18.5
Diversified Income 4,893,184 3,611,028 8,504,212
Mint Diversified Income 5,799,345 3,756,696 9,556,041
21.1
Diversified Growth 2,259,596 1,659,571 3,919,167
MLC PE Co-investment Fund II 1,055,875 1,055,875 1.6
Pioneer Capital PCP III 877,991 877,991 1.4
QuayStreet Income 3,445,998 3,445,998 5.4
Schroders Real Return + 5% 1,217,125 1,217,125 1.9
Self-managed Cash N/A 900,259 3,018,668 3,918,926 6.1
T. Rowe Price Global Growth Equity 3,693,597 3,693,597 5.8
NRC Total FUM 40,338,995 23,674,560 64,013,555 100
Note: all values are in NZD
FUNDS UNDER MANAGEMENT: ROLLING MONTHLY TIME SERIES
70,000,000
65,000,000
60,000,000
55,000,000
50,000,000
45,000,000
40,000,000
35,000,000
30,000,000
25,000,000
20,000,000
15,000,000
10,000,000
5,000,000
-
08/2012
12/2014
04/2017
12/2012
04/2013
08/2013
12/2013
04/2014
08/2014
04/2015
08/2015
12/2015
04/2016
08/2016
12/2016
08/2017
12/2017
04/2018
08/2018
12/2018
04/2019
08/2019
12/2019
04/2020
08/2020
12/2020
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Actuaries & Investment StrategistsNorthland Regional Council
Quarterly Report 31 December 2020
FUNDS DENOMINATED IN AUD
Funds Denominated in AUD LTF NRC Total
$ AU$
BlackRock FIGO 1,166,497 1,166,497
Continuity Capital Fund No.5 662,169 662,169
Federation Alternative 840,000 840,000
MLC PE Co-investment Fund II 985,200 985,200
Schroders Real Return + 5% 1,135,657 1,135,657
NRC Total AUD 4,789,522 4,789,522
PRIVATE EQUITY – COMMITTED CAPITAL (CALLED VS UNCALLED)
Private Equity Fund NRC Fund Committed Capital Called Uncalled Maximum Uncalled Total
$ $ $ Expected $
Continuity Capital No.2 (NZD) LTF 2,000,000 1,760,000 240,000 120,000
Continuity Capital No.4 (NZD) LTF 1,000,000 550,000 450,000 400,000
Continuity Capital No.5 (NZD) LTF 3,000,000 660,000 2,340,000 1,140,000
Direct Capital VI (NZD) LTF 2,000,000 265,625 1,734,375 1,534,375
Federation Alternative (AUD) LTF 840,000 840,000 0 0
MLC PE II (AUD) LTF 1,000,000 810,000 190,000 100,000
Pioneer Capital III (NZD) LTF 1,000,000 702,581 297,419 197,419
Total 10,840,000 5,588,206 5,251,794 3,491,794
NRC TOTAL UNDERLYING FUND ALLOCATIONS
60.0
New Zealand Assets,
Growth Assets, 50.1 50.4
50.0
40.0
Income Assets, 36.0
Global Assets, 32.1
30.0
20.0
Australian Assets, 15.0
Cash Assets, 13.9
10.0
0.0
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