Risk settings for a Dunedin City Council investment fund worth about $118 million could be tweaked to pursue higher long-term returns. Reconsideration of policies and objectives for the Waipori Fund follows a comprehensive review by council-owned Dunedin City Holdings Ltd (DCHL). DCHL recommended shifting from a risk appetite regarded as relatively conservative to a more growth-oriented approach. The council’s finance and performance committee is to discuss on Thursday what the fund’s updated statement of investment policy and objectives should be. As things stand, the fund has an allocation of about 45% growth assets and 20% income assets. DCHL said its most significant recommendation was a change in strategic asset allocation from a balanced income approach to a growth-oriented portfolio comprising 80% growth assets and 20% income assets. “While this would move beyond a conservative investment approach, it remains consistent with a balanced risk appetite, reflecting a greater willingness to accept investment market volatility in return for higher long-term returns,” a council report said. “DCHL considers that this allocation represents the best balance between return and risk.” Such a change would require the council to accept the return objective was a long-term one. “Short-term volatility must be expected and managed. “Evidence suggests that growth-oriented portfolios spend more years ahead than behind, but they require investors to tolerate larger fluctuations in value along the way.” The Waipori Fund was set up in 1998 after the council sold Waipori Power Generation Ltd and its 42% holding in United Electricity Ltd. When the fund was established, its value was $56m. At the end of June this year, the fund’s value was $117.7m. The fund has delivered $80.1m of distributions to the council since its inception. DCHL’s review concluded the fund remained fundamentally sound and had achieved its core objectives since inception. However, annual distributions might increase by about $800,000 or $900,000 if there was a change in approach. DCHL said the existing asset allocation was relatively conservative for a long-term, inter-generational fund. “The high weighting towards income assets reduces volatility and is intended to make cash distributions to council more predictable but forgoes growth and therefore delivers modest total returns.” The DCHL review said the council’s context as an investor had changed since the fund was created. “Facing more acute financial and operational pressures, the council has been clear in its desire for increased cash returns from its investments — changes are required to achieve this.” Other proposed changes include bringing in a distribution model that would incorporate a “smoothing mechanism” to average out disbursements and a transition period to create a buffer. “A transitional approach defers some of the benefits of higher returns in the near term to establish a buffer that supports higher and more reliable distributions in the future,” the DCHL review said.
