Claims passive approach could pose problems

Harbour Asset Management issued a report in which it said advisers and their clients could do well to move away from a purely passive strategy.

It said there was nothing wrong with investing in index benchmark-based equity funds, as long as investors understood what they were getting was the good, the mediocre and the expensive equities.

Harbour suggested advanced beta equity funds could be a better option, because they filtered out stocks with less desirable characteristics, or active stock-picking funds that could outperform passive investments in periods of market weakness.

Clayton Coplestone, of Heathcote Investment Partners, said product innovation in the New Zealand market should be encouraged.

“Those who subscribe to a passive philosophy believe that markets are efficient, and so are unable or unwilling to add value through active exposures. In this instance price must be the only differentiator for this commoditised approach to investing. Ultimately in a jurisdiction such as New Zealand where there is limited tax, and nil superannuation complexity, it will be increasingly difficult for these advisers to justify an ongoing presence, as consumers will be attracted to even lower price gateways such as roboadvisers in the future.”

He said the value-add for advisers who used an active philosophy included figuring out which active approaches were relevant and screening out approaches that did not meet expectations.

“Due to the ongoing monitoring and research required, this advice is worthy of an ongoing fee.”

Adviser Brent Sheather said passive investors worried about the risk in the equities market could rebalance their portfolios by selling equities and buying bonds.

He said active funds had a habit of taking on more risk before markets fell and reducing risk before markets rose. “Market timing isn’t easy.”

Sheather said: “2014 was the biggest year ever for FUM going into index funds. If they have fundamental problems, why is the world embracing the low-cost model so vigorously. I’m not advocating 100% passive ... the benchmark is 50% active 50% passive but we need to encourage a sensible discussion of the issues.”

Comments from our readers

On 15 January 2015 at 8:09 am John Milner said:

Clayton I don't think exposing clients to active management to justify an advisers relevance is a good enough reason. However, I agree with your comments regarding the lack of complexity in the NZ market. Perhaps rather than throwing our clients to the wolves we should take a look at our pricing and business models going forward. I know I'm doing just that. Not a pretty picture but is the reality going forward.

On 15 January 2015 at 9:58 am Mr UCITS said:

Even though it is not mentioned in either this article or the Harbour report, it should be noted that both are referring only to NZ equities. The NZ equity market is inefficient (the median return of all NZ active fund managers has been better than the performance of the NZX50 since 2006). However the opposite is true for global equities where median returns for NZ managers has lagged behind the MSCI World index since the late 80s.

Advisers need to be careful when comparing active and passive approaches for NZ vs Global equities and should remember that most NZ-based active fund managers outsource the management of their active global equity funds to offshore fund managers.

On 15 January 2015 at 11:29 am Mr UCITS said:

Even though it is not mentioned in either this article or the Harbour report, it should be noted that both are referring only to NZ equities. The NZ equity market is inefficient (the median return of all NZ active fund managers has been better than the performance of the NZX50 since 2006), however the opposite is true for global equities where the median return for NZ managers has lagged behind the MSCI World index since the late 80s.

Advisers need to be careful when comparing active and passive approaches for NZ vs Global equities and should remember that most NZ-based active fund managers outsource the management of their active global equity funds to offshore fund managers.

On 16 January 2015 at 11:07 am Brent Sheather said:

Not so fast Mr UCITS,

You conclude that “the NZ market is inefficient because the median return of all NZ active fund managers has been better than the performance of the NZX 50 since 2006”. There is one other more simple explanation for the outperformance and that is the Telecom effect. Telecom over that period was a very large part of the NZ stockmarket and most active fund managers underweighted the stock purely from a risk management perspective. From January 2006 to when Telecom demerged in November 2011 Telecom shares underperformed the index by 2.6% pa. That’s likely to be a major factor behind the outperformance ie the small company effect. It would be interesting to see what proportion of active fund managers have outperformed the NZX 50 since the demerger

Regards
Brent Sheather

Claims passive approach could pose problems

There are warnings advisers who opt for passive investments for their clients may soon find it hard to justify their existence.

Thursday, January 15th 2015, 6:00AM 4 Comments

Comments from our readers

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