13 Financial Instruments

Fair Value Measurement
Financial instruments are required to be specified in a hierarchy of fair value based on the degree to which fair value is observable.

• Level 1: Fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities.
• Level 2: Fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly (i.e. as prices) or indirectly (i.e. derived from prices).
• Level 3: Fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data.

All financial instruments held by the Group at fair value are classified as Level 1 and there have been no transfers between levels during the year.

Risks arising from the Group’s financial assets and liabilities are inherent in the nature of the Group’s activities, and are managed through an ongoing process of risk identification, measurement and monitoring. The Group is exposed to credit risk, liquidity risk, and market risk (including currency, interest rate and pricing risks).

The Group’s income is generated from its financial assets. Liabilities which arise from its operations are met from cash flows provided by these assets.

Information regarding the fair value of assets and liabilities exposed to risk is regularly reported to the Foundation’s management, the Foundation’s Investment Audit and Compliance Committee and ultimately to the Board of Trustees. The Investment Portfolio is regularly rebalanced to ensure that asset classes remain within the Strategic Asset Allocation set out in the Foundation’s Statement of Investment Policy and Objectives (SIPO).

The SIPO sets out the Foundation’s investment objectives. These can be summarised as:

• to ensure that the investment fund is invested prudently;
• to provide inter-generational equity with regard to distribution levels over time;
• to ensure that money is available for distribution, as required, to meet the needs and distribution policies of the Foundation; and
• to maintain the value of the investment fund’s capital base in real terms and to grow such capital value at a level equal to the population base growth of the region. Real in this context relates to the changes in the Consumer Price Index (CPI).

The Investment Portfolio
The Foundation manages its Investment Portfolio in terms of its SIPO. The SIPO is monitored on a regular basis by the Board of Trustees and, as required, amended to reflect international best investment practice.

The Portfolio’s Strategic Asset Allocation is reviewed at three yearly intervals. The Strategic Asset Allocation was last reviewed in 2012. Michael Chamberlain and Associates assists both management and Trustees with investment advice and portfolio monitoring.

Portfolio Characteristics
The Foundation is not directly involved with the analysis, sale or purchase of individual asset securities other than bonds and term deposits. Investments are made into either pooled funds or segregated accounts with Fund Managers. The performance of each asset class is measured against an appropriate internationally accepted standard or index for each asset class.

Global Equities:
This portfolio is measured against the MSCI World Indices, and is 50% hedged back to New Zealand Dollars by State Street Global Advisors.

New Zealand Bonds:
The New Zealand Bond portfolio is managed in-house. The Investment Guidelines provide strict limits on the underlying investment categories, along with credit and duration restrictions. The portfolio is measured against the NZX Government Stock Index.

Cash:
The Cash Portfolio is managed in-house. The investment guidelines place limits on the underlying investment categories, along with credit and duration restrictions. The portfolio is measured against the NZX 90 day bank bill index.

The SIPO sets out the following risks and mitigations:
Interest rate risk, reinvestment risk, default risk, currency risk, inflation risk, market volatility risk, market downturn risk, manager risk and timing risk. Comprehensive strategies are in place to mitigate each of these risks.

The credit quality of Foundation’s New Zealand Bond portfolio is managed by the Foundation using Standard & Poor’s rating categories as follows: