I met recently with Rishab Sethi from the NZ Super Fund. Rishab is the Chair of the Investment Committee and a Director in the External Investments and Partnerships team. I wanted to understand a little about their strategy, their performance, and their views on being the first sovereign wealth fund to adopt Bitcoin.
To frame this one, let’s start with a fundamental question: Why does investing work?
The S&P 500, is a list of 500 large publicly traded companies in the United States, whose stock prices are tracked to see how well the overall market is doing. Historically achieved an average annual return of around 10% before accounting for inflation, taxes, and fees. At 10% though, our investments can double in value approximately every seven years. We call this the rule of 72 (a simple formula used to estimate the number of years required to double an investment at a fixed annual rate of return by dividing 72 by the interest rate)
Reinvesting the profits of multiple companies, while you’re constantly adding more money over time through dollar cost averaging, can create a compounding effect, where returns generate their own returns. Our investment dollars give birth to dollar babies of their own, and this principle of compounding growth underpins why passive index investing can be a successful default strategy for everyday people.
Now, if we dig deeper, we can see that investing may also work for a negative reason: Because the value of money is constantly diminishing, through currency debasement. There’s a bit of nuance to this, but the first step requires a redefinition of inflation away from being something used to describe the rate at which prices rise, to the rate at which our money supply grows. The second step is to understand how our money supply grows. Governments, central banks, and even individuals contribute to monetary inflation. How? When money is borrowed into existence. Apart from recently, the growth rate appears to be around 8% over time.
So there’s a blue pill red pill version of CPI and but either way, if we’re not being compensated accurately for our loss in purchasing power, and the uncertainty of our future returns, we’re not going to achieve a super retirement. The reality still remains: If you don’t invest your money, you lose purchasing power over time. The reason investing works and why we must invest are the same: the money we use loses value over time due to currency debasement from the credit creation process, and inflated asset prices, and consumer prices, are nothing other than imperfect signals of this reality.
A leveraged property owning strategy, a concentrated share portfolio, or other, more uncertain investment strategies can provide a chance at getting an above-average rate of return, but with it, we need to accept the possibility we may get less than an above-average return. It’s cruel, but to get more, we have to accept more uncertainty.
The New Zealand government invests through the NZ Super Fund to ensure it can maintain Superannuation payments over the long term. By using a growth style fund consisting of 80% growth assets, and 20% income assets, they aim to grow a pot of money as large as they can to assist with the governments future obligations. Despite debates about eligibility age of government super, income-testing, contribution pauses, and investment strategies, the NZ Super Fund has been performing well since inception, and so I wanted to learn more.
