Fund manager diversification: unlocking better risk-adjusted returns in KiwiSaver

Most investors will be familiar with the concept of diversification both between asset classes and among securities within each asset class as the primary way to manage investment risk.

Thursday, August 17th 2023, 12:22PM

The same principle can be applied to fund managers as well, as the performance of any one manager can often differ significantly from their peers, even if they operate within the same asset class or utilise similar investing approaches.

For example, a Russell Investments study found that the difference in the 10-year performance between a top- versus bottom-performing global equities manager was around 5.7% per annum. While the difference between a bottom manager and a median manager was around 2.7% per annum.

Compounded over 10 years these annual return differences could mean an opportunity cost of a 30% lower KiwiSaver balance for selecting a bottom-performing single manager compared to investing in an average manager and a 70% differential as measured against the best-performing managers.

Of course, the potential for a 70% swing in gains may sound enticing to some investors, but picking the single best-performing manager is no easy feat and it also comes with the added risk of inadvertently selecting a manager that ends up at the bottom of the pack.

However, securing a median level of returns (and the associated 30% or more uplift versus a bottom-performing option) is not only readily achievable with a multi-manager approach but, in fact, can be done with a lower level of risk as well.

Investors who select multiple managers within the same asset class or investing style will naturally achieve a blended average return – one that smooths out any outlier manager performance.

By definition, the distribution of returns for the multi-manager options would have a lower dispersion (volatility) of returns due to this smoothing effect while still performing in line with the average of the individual managers.

In short, the multi-manager approach enables investors to garner greater risk-adjusted returns than one fund manager alone can deliver.

While using several managers should see KiwiSaver investors avoiding the low point in the cycle, the trade-off means they also miss out on the spectacular highs when one investment option ‘shoots the lights out’ in the short term.

However, most investors would likely be comfortable giving up the super-highs of any one concentrated position to be insulated from the ultra-lows. This is what diversification sets out to achieve – a more median-range return with less risk, leading to overall more consistent investment outcomes.

But with the design flaw in traditional schemes largely limiting investment to a single manager, how can advisers provide their KiwiSaver clients with the benefits of manager diversification?

Unleash the power of ‘and’ with the InvestNow KiwiSaver Scheme

The InvestNow KiwiSaver Scheme was specifically designed to enable fund manager diversification, currently offering KiwiSaver members access to 15 leading fund managers across 40 investment options – including diversified, single sector, ethical, active and passive solutions – all in one easy-to-use platform.

Learn more about the InvestNow KiwiSaver Scheme at investnow.co.nz/kiwisaver-betterfutures

FundRock NZ Ltd is the issuer of the InvestNow KiwiSaver Scheme and Foundation Series Funds. Product Disclosure Statements are available at www.investnow.co.nz

Tags: InvestNow