[GRTV] A trip around investment issues with MyFiduciary’s Chris Douglas

It’s not just changes to the trustee tax tax rate that’s driving PIE growth, MyFiduciary principal Chris Douglas tells Good Returns TV.

Monday, March 18th 2024, 6:26AM

by Andrea Malcolm

Eighty new PIE funds have come into the market in the last three years from local fund managers and their Australian peers launching new products here, Douglas says.

People are demanding more local NZ dollar PIE structures, they’re more tax efficient and show a commitment to the local market.

“A lot of investors are saying they only want to invest into PIE funds. If Australians want to play in our market they have to have PIEs.”

Douglas says MyFiduciary still invests into non-PIE funds and Australian Unit Trusts (AUTs), depending on the client.

“But there is a higher bar. Our first port of call is to say we’ll invest into a PIE fund, unless we can’t find that strategy anywhere in New Zealand, we’ll look for an AUT.”

He says a charitable trust may still have reasons to invest into a non-PIE vehicle, such as lower fees, the tax is not an issue and they might get a differentiated product.

“However, more and more people are now looking into PIE funds.”

He says the growth in demand is partly driven by changes to the tax laws but there is also more choice.

“Five years ago, finding a good global equity fund, you typically had to go to Australia. Now you can find all these great global fund managers that have got New Zealand PIE fund structures; you don’t have to go offshore, necessarily.”

Income focus not necessary

People get obsessed about income when they’re putting a portfolio together but they shouldn’t be, says Douglas.

“You’ve got to think about it from a total return perspective - income plus capital. I think a lot of people focus so much on not touching the capital and letting that grow but getting an income off their portfolio, and you can do that if you’ve got a good custodial structure that most advisers do, I think all advisers do.

“Then clients can just have a regular withdrawal process coming out of their portfolio and they can take, sometimes capital, sometimes income, depending on what’s happening. And it doesn’t really matter. You don’t have to be focused on getting income only, getting income off the portfolio.”

He admits that this goes against investor and adviser thinking.

“It goes against investors very much. They’ve got a psychological, behavioural view on their portfolio, but you can for sure think about your portfolio being like a bank account and taking out money on a regular basis when you’re in retirement and not thinking about income or capital.”

An issue with ESG

On the topic of sustainability, one of Douglas’ frustrations is ESG rating. He says it’s very tricky to look at a portfolio through an overall ESG lens.

“So fund managers will come to you and say, ‘Our portfolio is A-rated by Mercer.’ Great, but if I want to dig into that and understand how it stacks up on environmental, social, governance factors there are some strange outcomes that don’t add up or always make sense.”

An example is NZ and Australian REITs stack up really well on sustainability and it’s hard to know exactly why. You get a big environmental tick for a lot of those, although the amount of bricks and mortar and concrete that’s gone into some of these big buildings to set them up, they shouldn’t get a good ESG rating necessarily.”

He says some companies in NZ get a poor rating because of not disclosing enough to the ESG companies. Infratil is an example.

He would like to see more transparency about the ESG rating process and being able to dig into and understand why a company scores the way it does. Also people went too far down the path of blacklisting companies, or focusing on carbon when there wasn’t enough data”

“This journey that we’re on, and we’re definitely on it and it’s the same in the US, will continue. But I think that as we go along we need to make sure there’s some robust measures and processes in place.”

Having said that, he thinks the ESG agencies are still necessary and will play an increasingly important role around carbon emissions and there is some good data and information coming through.

There are a lot of funds now available with sustainability in the title and it will mean different things depending on the fund manager, the style, exclusions and the market they are investing into.

“It’s a catch-all phrase that seems to have taken off and you’ve got to read the label to understand what it means.”

Model portfolios

Kernel and Heathcote recently released some model portfolios created by MyFiduciary around their respective products.

“It was a really interesting exercise, and certainly one that came out of left field,” says Douglas. “We create a lot of model portfolios for different advice groups and clients that we work with. And we’ve got a framework that we use that’s relatively consistent from an asset allocation perspective, but then it depends on the client in terms of some of the building blocks.”

These include things like the type of tilts to certain market factors, the amount of high yield.

“We augment it depending on their philosophy, what they want to achieve and also their sustainability framework that they might employ as well.”

He says it was an open brief from Heathcote and Kernel with little guidance apart from the list of funds.

“The first question we had was did they have enough products to actually build a portfolio and what are the gaps? And there really aren’t any.”

He says the Kernel Global Bond Fund makes up for any global bonds gap. “In global equities you probably want a value manager but you don’t need one. Heathcote has a manager called Schroeders, they’ve got quantity and value, or factor tilts, in their process. It’s not all PIE funds, so there’s some AUTs in the mix - and that’s OK.”

He says the models have a relatively even mix of Kernel and Heathcote funds. He says one of the cool things was the mix of very active and differentiated active funds from Heathcote and the passive funds from Kernel, although not all Kernel is passive; cash and NZ fixed are active.

On fees, he says for the active funds, MyFiduciary was able to about 36 basis points on the low risk profiles going up to the high forties for the high risk profiles.