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Biggest fund managers struggle to deliver returns: Researcher

Investors are being told to think twice before they put their money with the most popular fund managers.

Thursday, April 20th 2017, 6:01AM 1 Comment

by Susan Edmunds

University of Otago Business School researcher Eric Tan said “superstar” fund managers, such as those who won high-profile awards, could end up delivering suboptimal results for their investors.

“They get an influx of money due to a greater profile and it is harder for them to make a positive return.”

Most would reinvest new money on existing stocks, he said, rather than seek out new investments.

There were also questions about compensation when a fund manager experienced a large inflow of money, he said.

“Fund managers do want to get more pay and they are compensated as a percentage of assets under management. There’s an inherent problem because on one hand fund managers do want to grow the pot of assets to maximise their compensation. But the larger the assets under management, it creates more difficulties to generate positive return.”

He said his research had looked at US fund managers but some New Zealand managers were also nearing capacity.

Investors should look for fund managers that had a good, long-term track record, he said, but try to avoid the largest ones. “[Investors] are better off in a smaller mutual fund.”

Murray Harris, of Milford Asset Management, said it was not fair to expect Tan’s research on US managers to apply in New Zealand. But he said concerns about capacity were valid.

“There is lots of research from the likes of Mercer and Russell locally which shows that active New Zealand managers can and do add value as the market here is less efficient than the US where there is lots of information on lots of companies so its harder for managers there to find an edge versus the market," he said.

"To a degree he is right about funds getting too big and losing their edge. Which is why some local managers close their local equity funds to new investors so they can keep generating alpha. For example we closed our Active Growth retail unit trust in September 2013. Our KiwiSaver Active Growth Fund remains open as KiwiSaver flows are smaller, regular and steady.

"However with over $5b of funds flowing in to KiwiSaver now each year it will be harder to find good New Zealand companies to invest in if we don’t see more quality IPOs.”

Tags: funds management

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Comments from our readers

On 24 April 2017 at 5:49 pm Pragmatic said:
Good research to support what we already knew... and yet, there are plenty of industry participants who (mistakenly) believe that bigger is better, and are unable to distinguish sources of alpha from beta.

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