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Environment changing for active managers: Researcher

New Zealand active fund managers did not deliver in 2018 on their promise to add value in volatile markets, researchers say.

Tuesday, January 29th 2019, 5:00AM 5 Comments

NZX data shows the last quarter of the year was one of the worst for global equities in several years, thanks to concerns over the global economic outlook, combined with tightening monetary conditions, trade tensions and European political uncertainty.

In New Zealand, the NZX50 fell 5.8% in the final three months of the year.

The average fund manager underperformed by 1.57% - returning an average loss of 7.34%.

Smartshares' NZ Dividend fund, down 0.74%, and NZ Mid Cap, down 2.49%, were the best performers in the data for the quarter, followed by AMP Capital's Responsible Investment Leaders share fund. Mint's SRI equity fund also did better than the index, down 5.6%.

"When you have a sell-off in markets, fund managers often say this is when active management shines,  but that wasn't the case in 2018," said Chris Douglas, a principal at MyFiduciary.

He said that could be in part because the market movements in New Zealand in recent years had been driven by the fortunes of a small number of companies. "A2 ripped through the market and had a big impact on returns."

When its share price wobbled in the latter part of last year, that had an effect on the returns some managers could deliver, he said.

Some had started to invest a significant proportion of "New Zealand" equity funds in Australian shares, which had been hit harder, he said.

"But if you take a step back, a key factor also coming across is that a lot are struggling to find value in the New Zealand equity market."

There was now more diversity of offering of New Zealand equity funds, he said and investors had many more options to choose from.

He said it was possible that the market environment was changing.

The return premium that active managers were able to find in New Zealand might not be there so much any more, he said. 

As a smaller market, New Zealand has historically been seen as less efficient, and managers had the ability to sway their fortunes more significantly by backing the right big firms. There has also been less research of New Zealand stocks.

"There will always be high quality active managers who can outperform the market but in recent years, it's got harder and harder."

Morningstar Asia-Pacific director of manager research Tim Murphy said global players still came into the market with what local players saw as "dumb money" -  backing the same big stocks.

He said those that got ahead of the index in the quarter had a different mandate, and were particularly less growth-oriented funds.

He said New Zealand was one of few international markets that active mangers could dominate in and, unlike Douglas, he said he could see no sign of a long-term shift away from that.

Tags: Active v Passive equities Morningstar

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Comments from our readers

On 29 January 2019 at 7:32 am Pragmatic said:
I don't doubt the numbers Chris - with an interesting insight from NZ Super that suggests domestic active Managers with over $1.2bn struggle to add meaningful returns.
On 29 January 2019 at 1:43 pm Graeme33 said:
...a fairly obvious insite,those in the smaller bracket..up to NZD400M clearly are not interested or dont have the ability/Knowledge to hedge any exposure on the US equity futures Index products. Graeme Adams
On 29 January 2019 at 3:24 pm Michael Chamberlain said:
It is illogical to believe that when the going gets tough the active managers come to the rescue. What you know is that the index managers will get the market return assuming that they do not stuff up the administration/execution. Therefore, the active managers and those investors who invest for other reasons (eg the Auckland Council strategically owning part of Auckland Airport) will also by definition collectively get the market return. Some will do better and some worse, but the average will still be the market return less fees.

Therefore, if the market is going up or going down the average will be the market return less fees. If the market is going up and down (is volatile), the average will still be the market return. Yes, some active managers will do better, and some may consistently do better in a volatile environment but knowing who they will be in advance is difficult that no manager or adviser has consistently got right or is likely to get right.

The real question is not whether active is better than passive, it is which style will produce return outcomes more aligned to the needs of the investors (the hard outcomes) and give the investor confidence along the way (the soft outcomes). Some investors are prepared to give up some of the hard return to gain the peace of mind that some ‘expert’ is keeping an eye on their investments.
On 29 January 2019 at 3:25 pm Graeme33 said:
..something that may have been forgotton..Kiwisaver funds are considerably higher now than the GFC period 10 years memory I think it was the ANZ based funds were down some 30 percent.A bear market period now would definitely hurt some retirees in the next few years GA
On 29 January 2019 at 4:19 pm Graeme33 said:
In most countries Active means beat the a little...not an Absolute amount...please dont stand out from the pack.I did recieve some Correspondence from Mint recently..They beat the benchmark by 2 pernent...they only lost 4 or 5 percent ..and she was happy..Ho Hum Graeme

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