How to Benefit from the Cullen Fund

Investment Research Group

Most of the superannuation fund won’t be invested in this country but the parts that will be should add up to hundreds of millions each year. That could mean declining yields across all asset classes – bonds, shares and property – simply because there will be more money chasing the same assets. As not all assets will be equal, here’s a guide to where to invest:

Bonds
The fund will be focusing almost entirely on government stock (meaning the government will be lending money to itself!) plus top-rated blue chip corporate issues. As this money flows into these issues over the next few years, comparative yields are likely to be pushed down. This should mean that issues with lower ratings or are of a limited size will offer increasingly attractive yields by comparison. Therefore, one strategy should be to take capital gains on top tier bonds as their yields are driven down and recycle the money into lesser offerings. If that sounds a little risky, invest in longer-term bonds. Remember that as demand for bonds increase, their yields fall and at the same time their capital value on the market increases. Therefore, it is possible to sell bonds for more than you paid for them.

Shares
Many superannuation funds in New Zealand put 15% of their portfolio into the local market but the government fund is only allocating 7.5%. One reason for this is that it has significantly more to invest in dollar terms and there simply aren’t enough companies that meet its investment objectives. These have to be well established, well traded and large enough so that large numbers of their shares can be bought without distorting their share price or breaching the fund’s requirement never to own more than 20% of a company. In essence, this means Top 10 companies, which between them make up around 80% of total market capitalisation. To see which are the companies involved, you can go to the stock exchange’s website: www.nzx.com. Demand for these shares will see their prices go up and their yields come down. The days of New Zealand companies offering dividend yields that are substantially larger than those of overseas ones appears to be coming to an end. Once again, smaller, less liquid companies won’t receive that government injection and investors could do worse that sell major shares into a rising market and recycle the money into higher yielding second-tier options.

Property
It is unlikely the government wants to become a property developer so much of the funds allocated for this area will go into big-ticket industrial and commercial properties, such as office blocks in the CBD. While it is hard for small investors to take advantage of this, rising prices in this sector should flow through to small properties and should also benefit listed property trusts, boosting their asset backing. Property trusts are an effective way for the private investor to stake a claim in commercial property. They are liquid (easily bought and sold), and most offer decent dividend payouts.

Of course, one shouldn’t base investment decisions solely on where the government is investing. But knowing where the Cullen fund is likely to invest could help with your asset allocation and timing decisions.