While the government wants the New Zealand Super Fund to invest 40% of its money in New Zealand, the Guardians' seem to pour cold water on the idea in their previously confidential briefing to Bill English

The Guardians of the New Zealand Superannuation Fund have told the government it will struggle to reach its goal of having 40 percent of the fund invested in this country, Pundit can reveal.

In an assessment that reflects the poor state of our stock exchange and the small size of our economy, the Guardians conclude there are simply not enough quality assets to be bought in a country.

The Super Fund has for the first time made public the briefing it prepared for Finance Minister Bill English just weeks after the election, following an OIA request I made a few weeks ago. During the campaign, National promised legislation requiring the Super Fund to invest "at least" 40 percent of its funds in New Zealand assets and businesses. Currently the Fund invests around 18 percent of its money in this country.

While the Guardians are sympathetic to the policy outcomes of increased investment in New Zealand – such as "higher economic productivity" and "a step change in infrastructure investment" – they suggest in their December briefing that there are better ways to achieve those goals, including direct government investment or "the establishment of additional investment instruments".

The implied message to the minister is – hands off our cash.

They are clearly cool about the 40 percent promise; the tone of the document can be summed up as, 'Thanks, but we'd really rather not'. As the Guardians write, "our current allocations already represent a significant home country bias..."

While the Fund has around 18 percent of its assets in New Zealand, including 5.8 percent in listed equities as of December, New Zealand equities make up just 0.2 percent of the global listed equity market.

The Guardians politely but firmly point out numerous "practical limits" to the policy.

For a start, any increased investment in New Zealand will be long term and of no use helping us out of this recession. The Guardians talk about the difficulties of even reaching 40 percent by... 2018.

To do that, they would have to increase the "dollar sum invested" from $2.2 billion to – wait for it – "a figure ten times that size"; over $22 billion. That's a whopping amount, and the basic problem – in the most basic terms – is that there isn't enough good stuff to buy in this small country.

Private Equity funds? The Fund is invested in two, but "looking ahead it seems unlikely that there will be sufficient flow of attractive transactions to make more than a very modest difference in the Fund's allocation (as a percentage...)".

Property, then? Apart from the poor signal that would send to already property-obsessed New Zealanders, "premier properties are generally tightly held". Nothing much worthwhile for sale.

Timber? The Fund already co-owns the cutting rights to Kaingaroa Forest (with Harvard University, don't you know). "We will continue to search for profitable investments as they arise," the Guardians say, hopefully, before adding... "which is not often". Oh dear.

Debt instruments and cash? Yes, the Fund could buy more government bonds, but as the Guardians rather drolly point out, "From a whole of Crown perspective, though, that could be somewhat circular". Nothing very productive about the Crown buying bonds from the Crown.

What's left? Infrastructure. Now that the Fund likes. In fact it complains that it has two managers looking for infrastructure investments, and they've been "seeking opportunities for some time". Again, they're saying, we'd spend more here if only there was something decent for us to get our hands on.

The Guardians give the government a pretty unsubtle nudge, adding that, "new opportunities and potential asset classes would need to be made available...". In other words, if you can get some Private-Public Partnerships going – hint, hint – we'd be more than happy to invest.

I can't tell you what the Guardian's short conclusion is. They've blacked that out, as they have roughly a third of the document. They cite commercial prejudice, "the substantial economic interests of New Zealand" and their need to offer "free and frank" advice to the minister as reasons for their censorship.

But the implication of the heavy black lines through the Risk Management section of the seven page paper is that they don't like the risks a 40 percent requirement would expose them to. In an uncensored line they write:

Assuming sufficient investment opportunities were to become available (and given they've spent the previous six pages laying out the lack of investments, that's clearly a might big if), the Fund would still be exposed to geography, asset type, and single asset concentration and exit risks.

The policy, however well intentioned, just doesn't seem to add up. Yet about the time it was receiving this advice, John Key was still pushing the idea in the speech from the throne:

[The government] believes this Fund should be used to invest in our country's future growth and to underwrite our future prosperity.  My Government will therefore set a target of at least 40% of the Super Fund to be invested in New Zealand.

This is not a briefing the government will enjoy having made public. Already faced with having to break at least one election promise – when it likely cancels or "defers" tax cuts in the Budget – the warnings in this paper must also be causing Cabinet to have second thoughts about this policy. Treasury is in the process of preparing its own advice on the 40 percent issue.

I asked business commentator Rod Oram to have a look at the briefing, and he says the Guardians have done exactly as they should, guarding the fund from the politicians. Oram was struck by the "very challenging numbers" required to grow the local invest from $2.2 billion to $22 billion. "That means replicating what you've got now every year for ten years," he pointed out.

This is a crucial debate for all Kiwis. By 2040 superannuation is estimated to be costing us $50 billion a year. As a non-baby boomer taxpayer who will be helping carry the "lucky generation", I want us to have cash in the bank.

(The arguments against pre-funding and about whether to cut contributions to the Fund during the recession are important, valid and related, but the question of where this money should be invested and who decides that matters quite apart from those debates, so I haven't gone into them here).

New Zealand Herald columnist and former Super Fund guardian Brian Gaynor spoke out against the policy when it was announced, arguing that the Guardians should be left alone to maximise their profits. As Gaynor has written, compounding interest means that if a New Zealand-wards tilt meant even a two percent drop in the Fund's annual return, we could be over $100b worse off. In October last year, he concluded:

This column fully supports more investment in New Zealand but has major reservations about raiding the country's only long-term savings fund to achieve this goal, mainly because it sets a dangerous precedent as far as future political meddling in the fund is concerned.

This column tends to agree. And it seems the Guardians do too.