Is New Zealand’s managed fund structure costing investors?
A new fund manager says New Zealand investors are getting a raw deal from managed funds that are being incentivised to mirror indexes, even when they claim to be actively managed.
Monday, January 19th 2026, 9:11AM
Jack Drury, who is in the process of establishing Seapoint Capital as a private investment partnership for wholesale investors, expects to be operational next month.
But he recently posted on his Substack his concerns about KiwiSaver and manged funds in New Zealand.
He said returns from the the providers that dominate the KiwiSaver space are lagging behind the S&P500 and MCSI World Index over the past five years, which have returned 13.9% and 16.1% respectively.
He said across Fisher International Growth Fund, Milford Global Equity Fund, Harbour Global Equity Fund, ANZ International Share fund, ASB Growth Fund and Westpac Growth fund, “every single one of these ‘active’ funds lagged both. The average fund’s performance coming out at 9.2%.
“If you had a $100,000 KiwiSaver balance today, excluding any further contributions, that difference compounds dramatically.
“After 20 years, it is the difference between having $600,000 versus $2 million. A gap of that size is life-changing, and it only widens further once contributions are added.”
He said the funds held big names such as Microsoft and Nvidia not because of research or conviction but because they dominated the indexes and managers copied them.
“For these managers, staying safe does not mean protecting your capital. It means protecting their business. The biggest risk to a fund manager is not a bad investment. It is investors pulling their money.
“So the rational move is to stay close to the index and to what other big funds are doing. Match the market’s returns closely enough, and the management fees keep flowing. Fall behind it noticeably, and the money leaves.
“That is why these portfolios can look so similar to the indexes they claim to beat. They are designed to retain assets, not to outperform.”
He said as funds got bigger, their ability to invest meaningfully would shrink. “Large funds cannot take real positions in smaller, overlooked companies, because even a small allocation becomes too large in dollar terms. Constant inflows and outflows force them to hold cash and trade at inconvenient times.”
He said because fund managers were paid on asset under management, the incentive was to be safe, not right.
“Managers are paid a percentage of funds under management, so their income rises with size, not performance. A 1% fee on $10 billion dollars is far more valuable, and far more certain, than any bonus for beating the market.
“The biggest threat to that income stream is not a poor investment call. It is investors pulling money. And what makes investors pull money? Seeing their fund fall too far behind its peers and the market.”
Drury told Good Returns most KiwiSaver providers were charging an active management fee regardless of whether the fund was actively managed in reality.
“In practice, many of these funds behave like passive or semi-passive portfolios while still charging active fees.
“A better structure would be a much lower base fee, closer to a passive management fee, combined with a genuine performance fee that is only earned if the fund meaningfully outperforms its benchmark over time.
“At the moment, KiwiSaver members are paying for activity they are not receiving. They are getting portfolios that closely track indexes, incur all the frictions of large active funds such as cash drag, trading costs, rebalancing costs, and forced liquidity management, and then underperform the market even before fees are considered.
“If a fund is going to behave passively, it should charge passive fees. If it wants to charge active fees, then it needs to be genuinely active, concentrated, and willing to look different from the benchmark.”
He said it was not an issue that was unique to New Zealand and happened anywhere that fees were based primarily on assets under management.
But Gertjan Verdickt, a lecturer in accounting and finance at the University of Auckland, took issue with some of Drury’s points. He said the currency movements between the New Zealand dollar and US had not been accounted for.
“To ignore this is to miss a major component of an international investment's performance. A more accurate comparison would measure the S&P 500's performance in NZD terms or use a currency-hedged index as a benchmark, which would provide a truer picture of what a local investor would have experienced.
“The suggestion that one can simply buy the S&P 500 is also a simplification. The vehicle for such an investment is typically an Exchange Traded Fund (ETF) or a tracker fund. While these are rightly praised for their low costs relative to active funds, they are not free. Investors still face management fees, brokerage costs to buy and sell the ETF, and potential spreads. These costs, while small, create a drag on performance, ensuring that an investor's actual return will always be slightly less than the index itself. This context is crucial when setting realistic expectations for passive investment strategies.”
He said it was also a problem that the analysis was retrospective.
“The critical question is not what performed well yesterday, but what is positioned to perform well tomorrow.”
But he said he agreed that immense inflows into passive funds had altered the structure of markets.
“This trend has disproportionately benefited large-cap stocks, as index funds are forced to buy shares in proportion to their market weight. This can create a self-reinforcing cycle where money flows into the largest companies, pushing their valuations higher, regardless of their underlying fundamentals. This phenomenon also increases correlation, causing stocks to move in lockstep, and can heighten volatility as automated buying and selling programs react to market-wide trends.
“However, I believe this is a temporary state of affairs. The theory known as the ‘impossibility of efficient markets,’ outlined in the Grossman-Stiglitz paradox, is highly relevant here. The paradox posits that if markets were perfectly efficient, there would be no incentive for active investors to exist, as they could not outperform. But without active investors seeking out information and identifying mispricings, the market would cease to be efficient.
“Therefore, the market can never be perfectly efficient, nor can it remain permanently inefficient. If the flood of passive money creates significant and obvious mispricings between large and small companies, or between value and growth stocks, active managers will eventually exploit these arbitrage opportunities. The very inefficiencies created by the dominance of passive investing will sow the seeds of a potential revival for skilled, active stock-pickers.”
Drury said Seapoint Capital would be a long-only, small-cap, value-focused equity strategy, run as a concentrated portfolio. “The fund is designed to do what large managers structurally can’t. Scale makes genuine active management difficult, whereas a small partnership structure allows for concentration, flexibility, and alignment.”
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