Should you back fund managers to beat the market?

Thursday, 7 December 2017

Some managers say an active approach is the best bet when prices fall.

KiwiSaver has given many New Zealanders their first taste of investing in managed funds.

But as balances grow and people start to pay more attention to their KiwiSaver investments, further questions have started to emerge.

Passive managers ride market trends, whether values are going up or down.

First it was fees – the addition of Simplicity to the KiwiSaver market put the focus on the fees providers were charging.

Now, some KiwiSaver investors are pondering whether they are better suited to a manager with an active approach – with stock picking and other investment decisions designed to maximise the return of the portfolio, or a passive one – where funds are invested in a vehicle such as an exchange-traded fund, that simply tracks an index.

* Martin Hawes: Stay active over passive funds

* New Zealanders look for more ways to grow their money**

Most KiwiSaver fund managers take an active approach – Simplicity, SuperLife and ASB are the exception.

Active advocates

Chris Douglas, director of manager research ratings at research house Morningstar, said the New Zealand market was a better fit for active managers than others around the world.

A number of domestic equities managers had mandates that allowed them to dip into the Australian market, which could sometimes help them beat the local share market index, he said.

Because New Zealand's market is small by global standards, flows of foreign money made a big impact, he said. Active managers who were watching the market could pick the right times to jump in and buy stocks at good prices.

'Global fund managers can very abruptly sell down New Zealand companies for whatever reason, and as a result that creates opportunities.'

Clayton Coplestone, of Heathcote Investment Partners, said there were certain times when it could be argued that market conditions made it better to be in a passive fund. But now was not one of them.

'Those times are usually when everything is going up and all indicators are pointing in a common direction. It's difficult to make an argument to pay a premium for active management. But we're not in that environment at the moment, thee are mixed signals coming through.'

Passive funds would simply ride an index up, taking the gains the market was generating. But when a market was more volatile, active managers could pick the stocks that would be less affected by a downturn than others, and avoid overpaying for stocks that were likely to fall in value.

Coplestone said the current run of strong share market returns could soon come to an end. 'The money you might save in passive fees may be eroded in the passive funds being caught up in a market turn.'

David Beattie, of KiwiSaver provider Booster, agreed that it was in a tough market that active managers could be expected to shine. 'I'm very confident that those funds that do have an active component … will protect a lot of downside when the market is going down.'

But Coplestone warned that people needed to make sure they would get what they expected from their fund manager. 'A lot of managers who claim to be active give a passive result but charge an active fee. They probably give active managers who do deliver good absolute returns a bad name.'

Passive proponents

It's the question of fees that often drives people to passive investment. Active management costs more - and some researchers say it doesn't deliver enough to justify that.

Interest in passive funds has exploded over recent years. There is now about US$5 trillion in exchange-traded funds globally. Some of those funds have been credited with causing market distortions - Sky TV's share price increased when a global ETF fund bought a stake.

Financial Markets Authority data shows an investor in Booster's geared growth fund, which is actively managed, has paid 16 per cent of their returns in fees over the past five years, compared to 5.2 per cent for someone in ASB's growth fund.

Ayesha Scott, a lecturer in the AUT Business School finance department, said there was no evidence it was worth paying a higher fee for a fund manager's stock-picking abilities.

'Overwhelmingly all the research in this area continue to come back to point out that active managers cannot consistently outperform an appropriate benchmark. That has been shown again and again.'

AUT research into KiwiSaver providers in 2015 showed that none of the funds was able to outperform local and global benchmarks and there were instances where they under-performed.

She said some managers could outperform in isolated cases but over the long-term horizon of a retirement savings scheme, they would not be able to maintain that.

She said investors would do better to focus on finding the right type of fund for them, whether that was conservative, balanced, or aggressive - and then look for the fund with the lowest fees. That would usually be a passive option.

Adviser Brent Sheather said there was 'a lot of fake news' about passive investments.

But he pointed to SPIVA data, from S&P, which showed that over the past 15 years, 91.5 per cent of global share funds had underperformed their relevant index.

'Scaremongering is also used to put investors off focussing on cost. Some experts would like the public to think that low-cost funds pose a systemic risk to the market and ask 'what would happen if the market took a dive and the index-tracking ETFs all have to sell at once?' If the market took a dive why would those investors be any more likely to sell than anyone else?'