2018 brings challenges for fund managers

Fund managers are expecting the next 12 months to be a tough, competitive year - but growth is still on the cards.

Friday, December 22nd 2017, 6:00AM

by Susan Edmunds

Rebecca Thomas, of Mint Asset Management, said there would be challenges for the industry over the coming year.

"People need to be realistic about the fact we are at the end of a growth cycle."

But she said recent returns had been "super normal". The NZX50 is heading for a 22% gain this year, the strongest year in five years.

Thomas said, while it might not be at the same rate as previous years, growth would likely continue into 2018.

"A big positive for markets overall is that the recovery in the US is now properly entrenched."

Three expected rates rises in the United States over 2018 would set the tone for other countries, she said, and provide a potential headwind. Over the past year, rates had moved more slowly than many managers had priced in.

“Valuations in the US are expensive, so are New Zealand’s. Other global markets are reasonably varied. Equities can cope with rising rates but not steeply rising rates or a surprise.”

Over the past year, New Zealand's sector had been characterised by a big dispersion of returns, she said. "Some did very badly compared to the index and some did very well."

Those that did not have as much exposure to A2 and Xero, or were overweight to Australian small caps, did more poorly. A2 shares increased 278% through the year. "If you look at FundSource as an example, there's quite a range of manager returns."

John Berry, chief executive of Pathfinder Asset Management, said the environment had been more competitive for some time. "I wouldn't single out the next year, it's something that's been going for a number of years now."

There was increasing fee pressure and a push to improve products and communication with clients. "That's going to continue to happen in the next 12 months."

Thomas agreed the fee pressure was nothing new.

She said it was particularly strong in the context of KiwiSaver - and the default KiwiSaver review - as well as a push for active managers to justify their costs. But she said New Zealand funds' fees were not high by international standards. "Globally, all regulators are trying to drive down fees. UK and Australia are still more expensive."

Active managers' clients were generally happy with the fees charged when they were delivering well above the index after fees, she said. Search for income was likely to be important in the year.

By international standards, New Zealand was still underweight to passive investment and there might be more room for investors to move, she said.

If investment returns were to be challenged it would make it harder to retain and get new investor money, Berry said. But he said it was not a sure bet that the market would fall. “The longer the bull market runs for the closer we are to the end of it.”

Bob Jones wrote this week that "today's world's worst job is being a funds manager".

"They're all bragging about their recent years' brilliance, which is like taking credit for sunny days," he wrote. "But increasingly the really smart ones are cashing up and waiting."

Tags: funds management