NZ share managers measure capacity across a wide range, according to a new study by actuarial consulting firm, Melville Jessup Weaver (MJW).
According to the MJW report, which surveyed nine local fund managers, estimated capacity – the point at which funds under management drag performance – ranged from 1.2 per cent to 2.25 per cent of the NZX free-float measure.
“There was a reasonable range with the higher figures associated with the managers who were more focussed on the larger cap companies,” the MJW report says. “All the managers were clear that they still had some capacity before they needed to impose a soft close on the total business. In the case where a manager discussed a hard close, the limit was 30% above the soft close.”
Despite all managers claiming they were not at full capacity, the MJW study says “limitations in the NZ market” resulted in some firms ruling themselves out of the recent large mandates on offer from AMP Capital and the New Zealand Superannuation Fund.
The report says KiwiSaver, which is currently feeding about in about $500 million (a figure inevitably set to rise) each year to NZ share managers, is also bringing capacity issues to the fore.
“Managers will have different levels of inflows to KiwiSaver funds,” MJW says. “ANZ Investments has a strong regular fund flow while Harbour Asset Management or a Mint Asset Management will be less impacted. One would expect that there are some managers who are going to hit their capacity limits more quickly than others.”
Australian-based research house, Morningstar, echoed that sentiment in its most-recent KiwiSaver quarterly report.
Tim Murphy, Morningstar head of manager research, said KiwiSaver flows are pushing a number of local investment firms to capacity.
However, Murphy said that also created opportunities to expand the NZ fund manager market.
“We’re seeing several new successful boutique firms that have cropped up in recent years and there is room for more of that,” he said.
Rebecca Thomas, head of Mint Asset Management, said the capacity effect is already spilling over into NZ investor decisions.
For example, Thomas said the Mint Diversified Income Fund has garnered $30 million from scratch since it launched last September as investors weighed up capacity issues in larger funds, such as the Milford Income Fund, which reported funds under management of $1.1 billion as at April.
“We have no capacity constraints giving greater agility to exploit opportunities,” a recent Mint investor presentation says.
Thomas said while capacity issues in competitors has helped the cause, the Mint product is also unique in that it targets income from a broader range of local and offshore assets, including global equities.
Other investment firms are still waiting to benefit from competitor capacity but Mark Weaver, MJW principal, said the New Zealand market will need more managers as incumbent funds breach their limits.
The MJW report says NZ managers must make a “business decision” to close funds based on factors such as: the NZX free-float; annualised daily traded volumes; investment style, and; their exposure to the NZ listed property market.
Furthermore, managers must consider:
- Different capacity limits for each of their funds;
- Ability to diversify into Australian stocks;
- Maximum exposure levels to any one share (some may want to avoid the substantial shareholder disclosure requirements that kick in at the 5 per cent ownership level); and,
- The maximum targeted cash exposure .
Asset consulting and multi-manager firm, Mercer, reported similar capacity concerns earlier this year.