Passive not the easy option

Claims New Zealand financial advisers may need to offer active management to justify their fees have been slammed by proponents of passive strategies.

Friday, January 16th 2015, 6:00AM 3 Comments

by Susan Edmunds

Clayton Coplestone, of Heathcote Investment Partners, told Good Returns yesterday it would be increasingly difficult for New Zealand advisers who subscribed to a passive approach to justify their ongoing presence because consumers would be attracted by lower-cost roboadvisers.

Sam Stanley, of NZX, said good advisers would recommend the best product for a client depending on their risk appetite and stage of life.

“Passive investments are seen as a lower cost alternative and a safe pair of hands because you’re getting the performance of the index. Active investment has the potential to outperform the index and some investors have that risk appetite and are happy to put a percentage into something with the potential to outperform, others are happy to have the return of the index,” he said.

He said it was unfair to say that adviser who opted for passive investments were delivering less for their clients.

“You wouldn’t say that if you were an investor and someone recommended a passive investment that returned the index at a lower cost than an actively managed fund that delivered less than the index– that actually happens.”

Latest Fundsource data shows that of the 16 active New Zealand-only equity funds, none outperformed the passive SmartShares MIDZ exchange-traded over one or two years, and none of the 14 reporting outperformed it over three years.

This does not include managers such as Mint, Devon, Harbour and PIE who are transtasman.

For many investors, the best solution would be a mix, he said. “A lot of good New Zealand advisers choose passive funds for their clients as a core strategy to take up the majority of their asset allocation, maybe 50% to 70%, then recommend a smaller satellite strategy maybe in direct stocks or actively managed funds.”

Ben Brinkerhoff, of Consilium, said active management undermined advisers’ value proposition, because it encouraged them to make promises they could not keep, which damaged the trust clients had in their advisers.

He said that trust was what stopped them making emotion-driven errors through their investing lives.

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Comments from our readers

On 16 January 2015 at 10:01 am Craig Simpson said:

Why don't we get through all the headline return and passive vs active BS and look at risk adjusted returns to see which investments are actually adding value to investors on an after tax and fees basis.

On 17 January 2015 at 3:27 pm John Milner said:

Craig I think this debate has been lost on you just a bit. It's not as simple as just looking at the returns. It's about risk, assuming you can actually identify what's in the average active fund consistently (transparency), market coverage - is there concentration risk, cost - has the managers added value disappeared because of high costs, can the manager repeat the added value long term or was it short term luck, etc, etc.

On 20 January 2015 at 2:16 pm Craig Simpson said:

Hi John - the risk adjusted returns account for risk. You can use statistical modelling to try and determine if the manager is adding value or just plain lucky but this type of modelling is well beyond many advisers. By doing all the modelling on an after tax and fees basis as suggested in my original comment you can see if the manager added value. Transparency of holdings is something advisers will always struggle with but generally I have found many of the managers are very forthcoming with their holdings albeit on a slightly delayed basis.

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