Weaker markets may make fees harder sell

It may become harder for fund managers and advisers to justify their fees if markets aren’t delivering the hot returns of the past few years, MJW says.

Friday, January 24th 2020, 6:00AM

It has released its latest investment survey, which shows the average KiwiSaver balanced fund delivered 16.3% in 2019, the best result since the actuarial firm’s KiwiSaver survey began in 2009.

The top balanced fund was ANZ’s Balanced Growth Fund, returning 19.8% after fees. This fund also has the top ranking over ten years.

Amongst growth funds, ANZ again took the top ranking. In this category, ANZ has a similar asset allocation to its peers (although it does have a large weight towards property and infrastructure). Thus, its high ranking is perhaps due more to strong performance within asset classes – particularly global equities.

Milford’s Active Growth Fund was seventh over the year but had returned 12.6% a year after fees over a 10-year period.

The survey said that indicated that its higher fees had been justified.

“We can summarise the 2010s as a decade that saw remarkably strong returns from equity markets, while bond returns continued their trends downwards. While it would be disingenuous to suggest a market crash is around the corner simply because of strong recent results, it is sensible to expect the 2020s to prove more challenging.

“Interest rates are much lower than in previous decades, seemingly capping the upside for bond and cash returns. Additionally, central bankers appear near the limits of stimulus they can provide. This may remove the ‘gimme’ in equity markets – making active management more important.”

At the same time, investment managers were being challenged to provide more efficient, lower-cost solutions and more socially responsible investment options.

Actuary Ben Trollip said it would be hard for KiwiSaver and other managed funds to deliver the returns they had of recent years into the future.

There had been a long period of very strong growth in equity markets, he said. Now, central bankers and policy makers were nearing the end of what they could do to provide stimulus to markets, he said.

“We have to expect returns to be lower.”

He said, when returns were running in double-digits the difference between active and passive fees was less important as a proportion of total return. But if they dropped to 4% the difference in fees would be a much bigger proportion of overall return.

Investment advisers will also have to work harder to justify their fees if returns are flat or even negative.

“The same can be said for active management, it becomes more important,” Trollip said. “If you’re outperforming the index by 1% or 2% when markets are up 20% it’s not much but if they are flat or down that’s a big deal.”

He said many investors, particularly KiwiSaver members, were not ready to see their balances drop.

Trollip said there had been a move into stocks and markets that were high-yielding as interest rates fell globally. If that started to change, there could be an impact on the stock prices themselves and markets, such as New Zealand’s, more generally.

Tags: fees KiwiSaver Markets MJW