ASB appoints Vanguard as manager

I certainly hope this move will result in lower costs, given it is a passive solution, which in turn, will be pass on to the investors. After all that is in the best interest of the client? Didn't see the Manage allude to that though, so perhaps they are keeping the difference in manager fee between CFS and Vanguard?

...and the value proposition to customers is...?

Pragmatic just going back 20 years to speak to you, I suspect the ASB’s value proposition is well diversified low cost portfolios that hit their index every time. Unlike 8 out 10 active managers globally that charge 2,3,4... times that with sporadic success and hopes of being Harry Potter.

What I find amusing from those industry participants who favour passive investing over active is their continued ignorance. Whilst I suspect that more than 8/10 “active” managers have failed to outperform benchmarks, it suggests that circa 2/10 have consistently outperformed benchmarks. Whilst I could stop there, the reality is that there are circa 29,000 investment capabilities currently available for Australasian investors, with the majority providing a passive / quasi-passive solution for an active fee. These have been cleverly disguised by 3 decades of rising markets... [By the way – who said that benchmarks were relevant for the investor anyway?]

In a country like NZ where there is limited tax or superannuation complexity, coupled with diminishing portfolio returns, investors will be increasingly reluctant to pay a premium for “set & forget” investment strategies, or investment strategies that deliver net returns below a benchmark from the get-go.

Before respondents start banging out their jaundice defence of passive, it’s important to reiterate that I don’t particularly favour active over passive – with both strategies having a meaningful role to play in a typical portfolio. What I do get concerned about is the industry belief that consumers will pay an ongoing relationship premium because you’re a good guy/girl, despite that fact that there is little or no effort in constructing and maintaining an investment portfolio. Passive solutions are trending towards nil fees (ie: a race to the bottom, whereby Managers will earn their revenues from stock lending) and tend to outperform active Managers in certain market environments – eg: the past 20 years. But hey – if passive investing is your thing going forward, then invest direct and save yourself the anguish of paying any additional fees to an industry of mediocrity. It's also worth keeping fingers crossed that the next 20 years will reflect the past. Conversely, there exists a huge variety of active capabilities catering for an equally huge variety of investor requirements and delivering hugely varying returns throughout differing market environments. To simply lump all non-passive-capabilities into a single basket called “active” remains intellectually lazy and removes a key reason for investors to pay an ongoing premium for portfolio construction and monitoring. It takes work to identify which active capabilities add value – but that is (or at least should be) part of the value proposition.

It’s fair to acknowledge that there are many in the industry who plan ahead by looking backwards, with suggestions that “time in beats timing”, and that “well diversified low-cost portfolios hit their index every time”. The day to defend these outmoded beliefs will no doubt occur when investors lose real money or start questioning poorly constructed portfolios that consistently fail to meet their individual expectations. The alternative is for advisers to start reviewing the full range of investment options that are available, to ensure that the right mix is relevant to both the investor and future market market conditions…

And to finish on a Harry Potter quote: “Indifference and neglect often do much more damage than outright dislike.” –The Order of the Phoenix

The same old stuff from Pragmatic however coincidentally Bloomberg today addresses many of these issues. Here is a link to the story https://www.bloomberg.com/view/articles/2018-12-12/index-investing-critic-takes-aim-fires-misses

He could have been answering Pragmatic’s criticisms - I am starting to believe there is a god!

Pragmatic frequently talks about conflicts of interest so I’m wondering why he or she is so anti an investment strategy embraced so widely by institutional investors including our own NZ Super Fund?

In the interest of full disclosure Pragmatic are you in any way associated with actively managed funds, promoting them or encouraging investors to buy them?

Pragmatic, it's probably best not to accuse others of 'continued ignorance' on this topic.

Yes, over time around 20% of active managers have beaten the index, but unfortunately for your argument, it's not the same 20% every year.

Looking at persistency of outperformance, Standard & Poors notes:

"An inverse relationship generally exists between the measurement
time horizon and the ability of top-performing funds to maintain their
status. It is worth noting that only 0.91% of US equity large cap, and no mid-cap or small-cap funds managed to remain in the top quartile at the end of the five-year measurement period. This figure paints a negative picture regarding long-term persistence in mutual fund returns."

If you can pick the less than 1 in 100 funds that might consistently outperform the market over a 5 year period, that's a rare skill indeed. And that's assuming the 1% are even open to new investors - many top performing funds are closed.

To the point that passive managers only outperform in certain market conditions such as the last 20 years, note that in the last 20 years there have been two major market corrections (2000 tech crash and 2008 GFC) and active funds failed to beat the index in both those periods and over the full 20 years.

The whole reason passive investing started in the early 1970s (almost 50 years ago) was because even then the evidence showed active managers couldn't beat the index after fees. So I think I can say with some certainty that the next 20 years won't look any different.

Regarding your assertion that benchmarks are irrelevant, why are you advocating paying high fees to active managers if you and your clients have no way of assessing whether they add any value?

The fact is the largest value add any investment adviser can provide is getting the strategic and tactical asset allocation right. Around 90% of a portfolio's long term risk and return is generated by asset allocation, not manager or stock selection.

While you may want to spend 90% of your time sorting through 29,000 active strategies (in Australia alone!!) trying to find the 1% of active managers that might consistently beat the market, please don't suggest that investment advisers spending 90% of their time getting the right asset allocation and implementing this through passive funds are lazy. Investing in passive funds is very rarely a lazy, set and forget strategy. Passive funds are simply low cost, highly liquid tools to implement an appropriate investment strategy. Just ask the NZ Super Fund and countless other global institutional investors.

And to finish on a Warren Buffett quote:

"What I advise is…put 10% of your cash in short-term government bonds and 90% in a low-cost S&P 500 index fund. I believe the long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.”

One wonders why people who make comments on this forum choose to do so behind a pseudonym. Surely if you have anything relevant to say you should be prepared to use your own name!

Thanks Brent for the gift that keeps on giving – and also for referencing a useful article… albeit not exactly relevant to the conversation. Assuming that you have some time available over the coming weeks, you may enjoy reading a more balanced insight via https://www.centralbank.ie/docs/default-source/publications/discussion-papers/discussion-paper-6/discussion-paper-6---exchange-traded-funds.pdf?sfvrsn=6. Whilst it would be easy to counter all referenced articles with those that are diametrically opposed (in other words, there is no shortage of content to assist with any argument if you go looking), it’s worth acknowledging the following:

On similarities between large pension fund investment schemes and those of an average investor: I’ve discussed the relevance of these comparisons in previous rambles, and how the investment ambitions of a large pension fund are a poor model for the majority of retail investors to follow. As an aside, a large majority of global pension funds adopt a core / satellite model (to assist in reducing overall costs), whereby beta is pursued either directly or outsourced for low / zero fees, with the alpha obtained through very active tilts (usually outsourced unless there are internal capabilities that are available to deliver). As a significant number (excluding many defined benefit schemes) are positively funded, a growing number of these mega-large institutional investors ‘ignore’ tactical asset allocation in favour of employing alpha tilts… which is an avenue where they tend to devote significant resources and achieve meaningful outcomes. Some useful reads here can be found at the NZSuper & ACC websites.

Thanks also to Sam Handwich for some insightful thoughts into the difficulties associated with ‘active’ investing. No one said that it was easy (which is one of the reasons clients pay advisers), with differing ‘active’ capabilities delivering differing outcomes at differing parts of the investment cycle. I’m unsure of any single investment (active or passive) that delivers out-performance across a full market cycle – although I’m sure that readers will have their favourites - with advisers having to be aware of those capabilities that will meet client expectations at various stages. A summary at this point is that the industry must remain pragmatic (sorry – couldn’t help it) and diligent on whether various investment tools are still relevant for their individual clients. There are plenty of solid examples here, with many quality financial advisers working diligently to deliver solid ongoing outcomes for their clients (as opposed to those who have long since decided that they are unable to add value, albeit will still request an annual fee of some description for the privilege of calling you a client). Whilst I enjoyed your response, please note that the sifting of the myriad of investment options (active or otherwise) doesn’t take 90% of time when there are appropriate tools and processes in place – all of which are very accessible to the industry. To put it bluntly, it is extremely easy to identify poor investment solutions- irrespective of slick marketing and / or hollow promises.

And finally (before I respond to ‘Trish G’s blog) – and this was at the heart of my previous comments: there is no single investment capability that is appropriate for all seasons (including ‘passive’), just as there is no single universe that can be called ‘active’ (ie: all investment capabilities minus ‘passive’ does not equal ‘active’). Whether investors adopt a ‘passive’ approach or ‘active’ approach to investing, they are in fact both ‘active’ investment decisions, requiring careful investigation and ongoing monitoring… which is a useful segue to respond to Trish.

It is difficult to tell from the pseudonym whether Trish works in the financial services industry or not. For the purposes of my response, I’m going to assume not (apologies if this is incorrect). Contrary to the continued heckling from minorities, the vast majority of the NZ investment community comprises of hard-working individuals who strive to deliver meaningful outcomes for their clients. The vast majority of the NZ investment community are busy thinking about and providing relevant investment solutions for their clients, whilst remaining vigilant for the appropriateness of these – and as a result don’t get the time to squawk via the media about how good they are / how bad the rest of the industry is. Many of the NZ investment community utilize a combination of passive (for beta where there is no need to pay a premium) and active investment solutions at varying stages of an investment cycle ensuring that the portfolios are relevant for both the client’s circumstances and the investment environment. Unfortunately, the industry also has a darker side, comprising of intellectual laziness, vested interest and a myopic platform that is largely about self-promotion and complacency. Most defenders of the NZ investment community are quickly defamed by these squeaky wheels, who seem to find an abundance of time for self-promotion and constant attack. As an industry veteran who has heard it all before (ie: the rise of the passive populists has been a predictable theme towards the end of most bull markets since the late eighties), I remain cynical about those who continually crow about being right at the expense of other industry participants who simply don’t have the time nor inclination. One day I’m sure that my blog identity will be detected, although for the time being “pragmatic” seems to be a very fitting handle at this point.