The New Zealand Super Fund is cutting back on risk because global markets are becoming expensive.
The Fund's investment analysis manager Doctor Roland Winn says most of the major asset classes and investment opportunities it is tracking are trading close to fair value.
"With many asset classes at or above fair value, there is a relative shortage of outright good investment opportunities. Consequently, we are taking on less active investment risk than a year ago."
The Fund is managing $30.3 billion which will eventually be used to help pay for New Zealand's retirement costs.
Dr Winn says the global economy is growing slowly and the markets have largely recovered from the "remarkable volatility" that was seen in the early weeks of this year.
But growth is modest in the US, it is "muddling along" in Europe and is slow in emerging markets. That is a challenge for New Zealand because the New Zealand economy remains closely tied to the fortunes of emerging markets.
"While the US economy is performing well, from a global perspective it is the only cylinder really firing. Even aided by substantial policy support, self-sustaining growth in Europe and Japan remains elusive. Emerging markets are currently slowing, although we believe their long-term outlook is positive. Closer to home, the NZ economy remains closely tied to the fortunes of emerging markets."
The Fund has identified four key risks: a slowdown in China, climate change, regulatory changes and new technology which can disrupt existing industries.
"The global economy continues to struggle to recover from the GFC. We expect that interest rates will stay low for longer than in a normal recovery. We believe new technology will continue to disrupt economic activity, and that regulatory change will continue to reduce liquidity in both commercial and investment banking."
Dr Winn says as a long-term investor with "patient capital" the NZ Super Fund is in a "fortunate position to be able to look through market cycles and pursue long-term investment strategies without the pressure to chase markets".
The New Zealand Super Fund says it has reduced by five percent the amount it actively invests outside of what it calls its "passive reference portfolio."
Passive investment accounts for 75 percent of the Fund's total portfolio.
Entire books have been written about the difference between active and passive management. But here's a quick explanation: