tag:blogger.com,1999:blog-2830084253401570472.post4625598978638251988..comments2024-03-28T09:22:36.967+13:00Comments on Offsetting Behaviour: Correlated risks revisitedEric Cramptonhttp://www.blogger.com/profile/15831696523324469713noreply@blogger.comBlogger9125tag:blogger.com,1999:blog-2830084253401570472.post-67958056899897678892011-03-09T01:02:54.603+13:002011-03-09T01:02:54.603+13:00EQC has interesting materials here: http://eqc.gov...EQC has interesting materials here: http://eqc.govt.nz/abouteqc/investmennofndf.aspx<br /><br />EQC can't redistribute its fund across asset classes beyond certain ranges without consulting Treasury and Minister of Finance.<br /><br />Current makeup is:<br />- 27–33% global equities<br />- - of which 30–50% passive<br />- 55–73% NZ Fixed Interest (NZG and RBNZ only)<br />- 0–12% NZ cash ($250m max).<br /><br />Note no NZ equities at all. Before 2001, it was all fixed interest and cash, all the time.<br /><br />EQC's liability profile means its fund has to be (a) highly liquid at all times, and (b) highly conservative.<br /><br />If I'm reading the documents right, they're expected to go for just a 1/30 chance of a 2% loss in any year (!), and they're shooting for a minimum equity risk premium of just 1% (!). Their fund managers must be drawn from the pool of the most boring people on Earth.<br /><br />My guesstimate answers to your questions:<br />(1) very tight liquidity and risk parameters make hedging for forex risk sufficiently costly that weighting portfolio heavily to overseas not worth it.<br />(2) a fair proportion of NZ fixed interest assets need not actually be offloaded in initial stages (NZ cash assets act as a buffer), because payouts from the fund take time. Perhaps the fund could ride out the initial hit to the value of these assets (or even for a bunch of them, depending on terms, wait for maturity).<br /><br />Maybe not totally persuasive, but seems plausible to me. Then again, I'm totally not a finance guy -- my grasp on this stuff is tenuous at best. Take it all with a grain of salt.bk drinkwaterhttps://www.blogger.com/profile/16274208803479395825noreply@blogger.comtag:blogger.com,1999:blog-2830084253401570472.post-53043520858875966212011-03-08T15:31:09.934+13:002011-03-08T15:31:09.934+13:00Also be interesting to know what assets private in...Also be interesting to know what assets private insurers hold, how much is mandated and how much it varies.<br />For example I imagine US based insurers would still hold plenty of US treasuries. (Of course it's a much deeper market)Vnoreply@blogger.comtag:blogger.com,1999:blog-2830084253401570472.post-32298886312921220042011-03-08T11:52:52.661+13:002011-03-08T11:52:52.661+13:00It would be interesting to know whether any such c...It would be interesting to know whether any such consultations took place.Eric Cramptonhttps://www.blogger.com/profile/15831696523324469713noreply@blogger.comtag:blogger.com,1999:blog-2830084253401570472.post-16601337065366097072011-03-08T09:45:11.052+13:002011-03-08T09:45:11.052+13:00The holdings are determined by ministerial directi...The holdings are determined by ministerial direction see: http://www.eqc.govt.nz/abouteqc/investmennofndf/mindirection.aspx <br /><br />Specifically see section 9:<br /><br />9. The Commission must consult with the Minister if it intends to modify the portfolio composition from the following: <br />- NZ Government securities;<br />- up to a maximum of 35% of the market value of the Fund in global equities; and<br />- up to a maximum of $250 million of New Zealand bank bills.<br /><br />So no more than 35% held offshore...Duncannoreply@blogger.comtag:blogger.com,1999:blog-2830084253401570472.post-47757611454741296212011-03-07T23:33:00.915+13:002011-03-07T23:33:00.915+13:00Never said it was good, but I think it would expla...Never said it was good, but I think it would explain the weight in the portfolio.Kimblenoreply@blogger.comtag:blogger.com,1999:blog-2830084253401570472.post-88137897717188024182011-03-07T20:41:00.230+13:002011-03-07T20:41:00.230+13:00@kimble if by that you mean redemption by the govt...@kimble if by that you mean redemption by the govt, that makes things worse, not better. <br /><br />@Horace Dump NZ assets when the dollar seems strong, buy foreign. Perhaps some currency risk but they could always buy options if seriously worried about it.Eric Cramptonhttps://www.blogger.com/profile/15831696523324469713noreply@blogger.comtag:blogger.com,1999:blog-2830084253401570472.post-51440070553006469262011-03-07T19:51:24.200+13:002011-03-07T19:51:24.200+13:00Your right about the risk on risk element, but I s...Your right about the risk on risk element, but I suspect that the reason EQC holds NZ govt securities is to avoid forex risk, but that doesn't seem to be enough of a reason... If EQC held offshore assets and it was called to payout the NZD would have fallen, as it did after the Chch earthquake... which would mean that it would get a better return on its foreign holdings - all other things being equal...Horace the Grumpnoreply@blogger.comtag:blogger.com,1999:blog-2830084253401570472.post-40914327615516052112011-03-07T17:12:26.844+13:002011-03-07T17:12:26.844+13:00Could it be that they are holding the government s...Could it be that they are holding the government securities to allow a redemption at face value should a crisis hit?Kimblenoreply@blogger.comtag:blogger.com,1999:blog-2830084253401570472.post-58712651586119926842011-03-07T07:23:57.383+13:002011-03-07T07:23:57.383+13:00I guess we could also complain about the incentive...I guess we could also complain about the incentives resulting from their failure to risk-adjust the premium.Davidhttps://www.blogger.com/profile/10565910956857563935noreply@blogger.com