Retail investors get passive strategies: Stevens

Smartshares released data showing that, across the four key strategies for New Zealand investors, active managers underperformed in October. Stevens said the same looked to have been true of November, too.

He said a growing number of retail investors clearly understood passive investment strategies, as demonstrated by the growth of platforms Sharesies and InvestNow. They factored in cost as an important part of their investment plans, he said.

“Active managers are talking about how much cash they’re keeping in portfolios at the moment – that’s an expensive way to hold cash.”

Passive investors had got the message that their investments would follow market movements up and down, he said, and were prepared for market turbulence. By contrast, active investors might have higher expectations of their managers - and could be disappointed.

He pointed to international research that showed that through periods of volatility there were bigger outflows from active funds.

“Investors assume their managers will perform well in volatility because they’re paying for the service, for active managers to manage the crises. When that doesn’t happen they get upset and take their money out. Passive investors know it will go up and down and that’s what happens.”

Advisers would have a role as a psychological coach for clients, helping them stick to their plans through market wobbles, he said.

New Zealand is still lagging international trends with only 2.6% of open-ended fund assets in passive investments, compared to about 20% globally.

Stevens said many advisers had traditionally seen a role in stock selection but research indicated that their value for consumers would come from the choices they made about asset allocation.

Comments from our readers

On 6 December 2018 at 4:20 pm John Milner said:

Let me see: protection on downside, market timing, superior stock picking, strategic asset allocation - yeah nah. Think I’ll stick with a low cost, broadly diversified, evidenced based strategy thanks. Unlike some of my competitors, I can only work with reality.

On 6 December 2018 at 5:22 pm Pragmatic said:

More nonsense statements, filled of vested interest, attempting to flog over-priced passive investments.

Simply put: if advisers are struggling to add value in client's portfolios, then passive is a realistic solution - whereby your clients should pay 3pbs (with the scope of this price falling to nil). It is then up to the adviser to figure out what they will charge the client on an on-going basis for...

An alternative is for advisers to construct meaningful portfolios that are relevant for clients (ie: comprise of relevant investments that meet bespoke risk & fee budgets), that are built via a defend-able process, and are monitored periodically. If this sounds like hard work - then this is probably the wrong industry for you.

On 8 December 2018 at 2:09 pm John Milner said:

Pragmatic, I'm not sure what parallel universe you are from but from what I see most days of the week, is advisers flogging over-priced active management with far from index performance. All because they believe throwing their clients under a bus with additional risk justifies their own existence. I don't personally rely on tracker funds but I certainly don't believe my value comes solely with portfolio construction. Although important, that is a very small part of a much wider relationship I have with my clients.

Retail investors get passive strategies: Stevens

Advisers with client money in active funds may have more work to do during periods of sharemarket volatility than those whose clients pursue passive strategies, NZX head of funds management Hugh Stevens says.

Thursday, December 6th 2018, 5:59AM 3 Comments

Comments from our readers

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