Iwi trusts are becoming big business. They are growing their investment assets at 50 percent faster rate than community trusts according to study by Nicolas Maier, for his University of Auckland MBA. And it’s all down to asset allocation – not market timing, “better share picking” or luck, he concludes.
The study of total of 20 trusts – seven iwi and 13 community – highlights significant differences in the types and ratios of assets held by iwi trusts compared to community trusts. Asset allocation – the percentage of trust’s portfolio invested in each asset type – encompass broad range of investment categories such as cash, bonds, real estate, public shares, private companies and hedge funds.
Numerous studies have proved that, over time, asset allocation is the single most
important determinant of long-term returns.
According to Maier’s research, the iwi trusts are investing far higher percentages of their assets in equities and other growth investments. By comparison, community trusts hold proportionately more in cash and bonds to earn income to distribute today. “The reason for this difference is that iwis intrinsically tend to adopt very long-term intergenerational outlooks to support the future of their families and descendants,” Maier says.
The benefits of equity-like investing are, says Maier, illustrated by some very long-term investment data – 196 years of it in fact – according to Yale University’s chief investment officer David Swensen. He showed that if perpetual investment fund, not unlike New Zealand’s community and iwi trusts, held US bonds for 196 years it would have turned $1 invested into $9950 over those years. But holding mix of the US large-capitalisation stocks (similar to the Dow Jones Index) would have turned the dollar into $9.8 million.
In the short term there are, unquestionably, greater risks in holding equity-like investments because they can be volatile, hard to value and difficult to sell in hurry. Often, such investments require considerable due diligence, and ongoing time, energy and management. As result, Maier’s study noted that appropriate skills, experience and governance frameworks are essential for trusts investing in equity-like assets.
According to Maier, the community trusts he surveyed are investing nearly 50 percent in bonds and cash – regarded as lower growth, but less risky investments. Their equity investments are predominantly via sharemarkets. On average there are some small holdings, 15 to 18 percent, in private equity but these are usually specific assets such as local power generation companies or airports that have been gifted to the trust. “There are very few direct investments by the community trusts where they actually buy and manage portfolio of private companies as part of an equity strategy,” he says.
Consequently, community trusts are likely to get only the average market return over time. Iwi trusts are looking to actively manage their investments and work toward higher (eventual) returns. The iwis Maier surveyed have around 60 percent of their net assets in private companies and around 35 percent in real assets such as farms, forests and livestock.
“The iwi trusts are backing their own management ability or investing in companies which they feel have good management which they can leverage,” says Maier. “This is significantly different approach from the community trusts. Iwi are saying ‘let’s get involved and try to improve the outcome’. Community trusts are saying ‘I’ll take what I can get’.”
Based on their different investment strategies, Maier estimates that the seven iwi trusts will accelerate their value growth, surpassing the 13 community trusts before 2035 and creating an increasing size gap thereafter. In 50 years, by 2060, he forecasts the iwi trusts will have grown from $1.4 billion to $21 billion in assets (15 times larger) compared to the community trusts growth from $2.9 billion to $8 billion (2.7 times larger).
If the community trusts grew at the same pace as their iwi counterparts, they would reach $43 billion instead of $8 billion. The implications of this differential growth scenario are enormous given that trusts generally distribute proportion of their annual income or value to their beneficiaries.
As result of the different core asset allocations, Maier’s study forecasts that greater fund values will also lead to higher distributions to beneficiaries over the next 50 years. In 2009, total grants from the 20 trusts Maier surveyed were approximately $175 million. The community trusts distributed and paid out almost twice the amount of the iwi trusts – about $115 million compared to $60 million.
However, as with total asset values, the relative distribution levels will completely reverse in 50 years, Maier reckons. In the year 2060, the iwi trusts are expected to make grants of approximately $865 million compared to $320 million by the community trusts, according to Maier. The cumulative distribution results are equally impressive. During the next 50 years, the iwi trusts are forecast to distribute $15.4 billion compared to the $10.4 billion by community trusts.
Governance issues
Nick Maier’s father Sandy Maier, high-profile professional director who serves on the boards of number of perpetual trusts, believes that “one of the issues for trusts pursuing more equity-like asset allocations is making sure they have their governance set up correctly to ensure sound, long-term strategies are followed”.
According to Maier senior, iwi trusts are actively building their governance capability.
They are, he says, committed to providing formal training for their directors, adopting international best practice models for their existing organisations and, “changing their structures accordingly”.
“They are also using more formal written board charters and strategic plans, learning from and correcting their mistakes and, sourcing independent directors through independent search committees and search firms,” says Sandy Maier.
“Some of this means simply moving away from boards that have elected or appointed representatives to boards with better or richer mix of external, professional and skills-based members.”
Community trusts, according to Nick Maier, tend to hire financial advisers and use benchmarking process to guide their investment selection. Iwi trusts, on the other hand, have often been ‘gifted’, or settled historic claims for, large portion of their assets. In several cases they have, he says, hired in sector-specific experts to help them manage their assets – such as company directors, property managers and forestry managers.
Maier’s conclusion, therefore, is that the iwi trusts are pursuing the opportunity to manage the performance of their assets themselves using the best in-house management that they can obtain.
“The interviews and discussions I had during the study confirmed this was cornerstone of several iwi trusts’ investment management approaches,” he says.
Maier’s study found that perpetual trusts need rules for decision-making and to be disciplined about sticking to those rules in times of uncertainty or turmoil. “Some of the best organised trusts have worked very hard to get the best minds around their table and borrow ideas from best practice and international examples,” says Maier. “These trusts are building on decades of other people’s experience and recruiting external experts to assist in these endeavours.”
Maier also believes iwi trusts have approached their advisers and investments conservatively. “Having spent many decades fighting to get ownership of their assets back, there is an understandable desire not to lose them again. The process of building up management expertise has been gradual and somewhat emergent. The trend now, particularly in the larger iwi, is towards formalising their governance systems and structures and building up their internal management abilities.
“As one iwi member I spoke to said: ‘We try
