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KiwiSaver furore gave advice boost

Media headlines about KiwiSaver funds’ exposure to ammunition investments have provided a boost to some financial advisers.

Monday, October 10th 2016, 6:00AM 13 Comments

by Susan Edmunds

In August, there was a public outcry when it was revealed that a number of funds had underlying investments in companies that made armaments.

While that prompted a spark of interest in the details of KiwiSaver investments, some advisers seized the opportunity to spread the word about their services, too.

Roger Spiller, at Money Matters, said the media coverage, and the development of a web-based tool that offered the ability to see what KiwiSaver funds invested in, had “dramatically increased” awareness and interest in the scheme in general.

“In my over 30 years of promoting ethical investment I have never experienced so much media interest and so many requests for interviews. It seems that there has been a fundamental shift with many investors now wanting tangible proof that their money is not directly or indirectly funding unethical activities,” he said.

“Furthermore many are wanting their money to go beyond avoidance and to have their money invested in businesses than are leaders rather than laggards in applying ESG.”

Bill Raynel, of Investment Solutions Northland, who offers KiwiSaver to clients via New Zealand Funds Management, posted on his firm’s Facebook page, recommending that people in default schemes read about the investments in armaments, and said “if you don’t support their approach, contact us now…”

The post captured widespread attention.

“I posted it on Facebook and Twitter and it went viral,” Raynel said.  “The outcome has seen all KiwiSaver Scheme managers clean up their act in this regard, which is a good thing.”

Peter Lee at C2C Partners, said KiwiSaver could be a big driver in the development of New Zealand’s responsible investment landscape.

“For many Kiwis, it’s been their first exposure to managed funds, so now they have to make a choice – and Sorted et al are all telling them to take more interest in their retirement savings. With 2.4m people in KiwiSaver, you don’t need a big percentage interested in responsible investment to have an impact.”

But he said there was still less preference for responsible investment among his wider investment client base.

“Of those interested in [it[,  most have been what I’d call ‘light green’ investors – they want to do something but are pragmatic enough to recognise the need for trade-offs, especially given the options in NZ are limited,” he said.

“One factor for some is cost:  given my non-RI solutions mostly use Consilium’s  low-cost asset class portfolios, the gap in management fees between funds in my ‘standard’ portfolios and pure RI-based funds is close to 1%. I’ve had the interesting experience of an otherwise RI-inclined couple choose the non-screened option for this very reason. I’m looking to develop a hybrid approach which will alleviate the problem, but it isn’t easy to come up with a low-cost portfolio that’s RI-compliant.”

Tags: KiwiSaver responsible investing

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Comments from our readers

On 10 October 2016 at 10:09 am Brent Sheather said:
There is something vaguely ironic about people who recommend high cost funds advocating ethical investment.

On 11 October 2016 at 3:13 pm Pragmatic said:
The true irony is with those who mistake price for value...
On 12 October 2016 at 10:49 am Brent Sheather said:
That’s a great comment Pragmatic. I infer from it that you are either a fund manager or write Donald Trump’s speeches. Here is another pearl of wisdom “Confucius say man who gives advice but not his name talks nonsense”.
On 13 October 2016 at 2:25 pm Pragmatic said:
LOL - no I don't write Donald Trump's speeches, and I'm not a fund manager. But I do know that those who argue with "price" usually have little else to contribute.

I'm not sure about your Confucius quotes, but suggest that you consider "Real knowledge is to know the extent of one's ignorance". Enjoy
On 14 October 2016 at 1:28 pm Dirty Harry said:
People go into the organic foods aisle and select stuff. They go to shops that sell only organic/local/eco/all three products and pay more for the privilege.

They buy the enviro safe soaps and dishwasher detergent and freedom farmed pork and free range eggs even though they all cost more.

And they actually do it on purpose.
On 17 October 2016 at 8:27 am Brent Sheather said:
Hi Dirty Harry

I also buy organic products and pay more for the privilege however despite that I don’t think your analogy is a good one. For a start when I buy free range eggs I can be reasonably confident that the eggs are free range. Furthermore buying eggs is not a large financial decision and whether I pay 10% more for them or 20% more is not a huge issue.

Now contrast this analogy with buying ethical funds. As the Financial Times pointed out the other day virtually all ethical funds contain unethical companies. Secondly in most cases one doesn’t know the price one is paying for the ethical funds and in any case the fees that are disclosed are extraordinarily high. So Harry here’s your chance – disclose on Good Returns the name of an ethical fund you like with a link to their portfolio so that everyone can see there are no unethical companies like banks for example and so that we can see what the fees are and assess them relative to a 3% long term forward looking risk premium. Good luck.

On 17 October 2016 at 10:52 am Dirty Harry said:
No. You seem too ready to disagree, but I am actually supporting you for once, Brent.
Besides, I suspect you issued that challenge with a ready supply of organic free range, cost-twice-as-much-as-plain-eggs eggs in hand ready to throw at my face. It's a bit like the supermarket selling Pam's - it's own house brand that sells products where the ingredients are familiar, but not necessarily fully understood down to the farm they came from. People just trust that brand, rightly, wrongly... And if the definition of unethical is so wide it includes banks there is no chance that any suggestion I put forward that is not PAM's (Private Asset Management's) is going to satisfy.

But my point stands. We could be arguing the same thing - people are prepared to pay more for ethical investments in the same way they are prepared to pay more for free range eggs. And like their eggs, some are not as free range as others, such as John Garnett's Woodland eggs.
On 31 October 2016 at 2:55 pm blogger billy said:
ASIC strikes again

Aussie banks face $180 million penalty after charging over 175,000 customers for non-advice over multi-year periods.

The usual culprits - the big four banks plus AMP and Macquarie

The Ozzie mums and dads don’t trust the big banks, and there is a big groundswell in Australia for a royal commission of enquiry into their behavior and greed.

FMA please note. You might eventually be the last people on earth to trust them. That could be embarrassing for you.

Perpetual’s SRI Australian fund recently held Ozzie banks as their two biggest holdings.??

We offer our clients the option of sustainable and SRI funds if that appeals to them. Our favoured fund options charge 0.39% for global shares and 0.45% for global sustainable shares.

Pathfinder get a look in too with their SRI Water fund partly because it seems to work, and just as importantly, they don’t ooze greed, but instead display a high level integrity that is not always seen around the traps.

On 31 October 2016 at 2:57 pm blogger billy said:
Brent, I did hear a rumour that Pragmatic is a promoter of mainly actively managed funds
On 1 November 2016 at 9:57 am Brent Sheather said:
Hi bb

Thanks for that. You know isn't it funny that the main critics of the low cost approach to investing are people who own/promote high cost funds. Just this week we have heard from Carmel Fisher who asked “Can you win by doing nothing?” and then said “I wouldn‘t choose a passive option for anything in my life”. Well Carmel the fact is, looking at the funds you manage, doing nothing by owning an index fund would have meant you outperformed in just about every sector except for Australian shares where one shouldn’t have much money anyway.

Next up in the bad advice department was Martin Hawes who said “passive funds are okay but I try to do better” and “I believe the best investment funds are actively managed which means it’s worth paying higher fees”. Oh dear. Let’s consider Mr Hawes’ advice for a minute. How many fund managers indeed “do better”? The Financial Times reports that “99% of actively managed US equity funds sold in Europe in the last ten years have underperformed the index, 98% of global funds underperformed the world stock market index since 2006 and 97% of emerging market funds have underperformed in the same period. Good luck Mr Hawes.

By the way it’s a bit sad that the media blindly accepts outrageous comments from biased commentators “talking their book”. If I was interviewing these people I would be asking some hard questions to validate their comments.
On 1 November 2016 at 1:55 pm MPT Heretic said:
Breaking news....100% of passively managed funds underperformed their respective index over every period in every market (that is the ones who were doing a proper job that is). Bugger what do we do now?
On 1 November 2016 at 4:16 pm Pragmatic said:
In light of heightened consumer scrutiny (skepticism???) and challenging markets, this may be an appropriate forum to challenge the ignorance & mediocrity that some in the industry can continue to get away with.

A few of the mistakes that the New Zealand industry is oblivious to include:
1. Sacrificing returns to achieve diversification, and this nonsense called Modern Portfolio Theory (e.g. Sovereign Bonds)
2.Managing risk by limiting discretion (aka tracking error syndrome)
3.Poor portfolio construction, with little or no understanding of risk budgeting & other techniques
4.Overweight NZX 20 stocks, which are arguably expensive, and under-perform smaller stocks over the long term. An extension of this is the general over-weighting to the NZX in the first place – a country that has a 0.2% weighting in the world.
5.Underweight to alternative strategies & alternative asset classes as these are often more difficult to filter, and are generally poorly understood
6.Underweight to boutique managers who can outperform through a competitive advantage – again because of the difficulties in sifting through the plethora of stories & personalities
7.Poor decision making that is distorted by myopic (and often incorrect) beliefs
8.Short-term focused contributing to over-trading
9.Bad timing (volatility causes anxiety and bad decisions)

Most of these can be accurately summarised as industry complacency, whereby participants tend to hide behind statements such as “markets are efficient”, “fees are too high”, or “I’m unable to add value”. I’ve even heard of one participant who prefers to devoting time towards flying & blogging than spend time contributing towards the welfare of his client’s portfolios.

Then we get to the next layer of discussion (often used as justification of the above complacency), where participants promote fees as a central reason to not support / favour an investment. In response, I would argue that participants should not be constrained by fees. Many great managers charge high fees, and are worth it. Ask yourself whether you’d rather pay a 2% fee to earn 15% p.a. (after fees) or pay 0.5% to earn 5.5% p.a. Fees should reflect the difficulty of the task, the investment constraints and the skill of the manager – and of course, should be one of the last considerations once the relevance and history of the manager has been appraised. If price is your sole metric, then ultimately you yourself will be measured against this…

What really matters in portfolio construction is to focus on a core strategy that aligns to your investing values. This includes constructing an investment portfolio in the way you believe makes the most sense for your client. It is equally important to focus on investing for the long term and to be patient.

In my experience, the central element of portfolio construction is to invest with people you trust, rather than buying into celebrity statements, or listening to squeaky wheels. Trust takes time to develop, with key personal traits to look out for being honesty, humility, passion and consistency. Alignment of interests helps a lot – including managers who get performance fees, own equity in the business and co-invest in their fund.

Whilst past performance is no guarantee, it sure is a good guide – if you think about it the right way! Managers whom are being appraised should be assessed over the long term and preferably through one or more market cycles. They should always be measured relative to a fair benchmark and concentrate on negative market periods. It’s also worth remembering that performance is personal. It comes from the Fund Manager (or team). Not from the Fund. Very rarely from the process. And definitely not from the Management Company.

The more freedom a manager has to invest in what they like, the more opportunity to outperform – but this requires a high level of trust in the ability of the manager. If you don’t know the strategic advantage the fund manager has – then they don’t have one. Any strategy where specialisation combines with limited opportunity or less competition can be good.

If all of that seems too hard (and it’s not meant to be easy), then the easier option is to claim that “markets are efficient”, or “I’m unable to add value”, seek the cheapest gateway, and figure out how you’re going to make money – coz consumers ain’t going to pay for mediocrity!
On 2 November 2016 at 10:12 am blogger billy said:
Praggers oh praggers you should know better

Many advisers are ill from the "should" virus. You should stop "shoulding" on us so we can all get better sooner.

Terrible me - I go flying

I own a Pipistrel Sinus motor glider – a fabulous machine, and I love gliding / flying.

But I have only flown about 50 hours a year over the past 10 years. Probably a lot less time than you spend on the golf course (but then we all need recreation, don’t we )

Why do I fly so little? because I am busy looking after my clients and their money

But Praggers I agree with you on one thing – we advisers must find fund managers and fund promoters and consolidators that we can trust.

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