Almost all NZ active fund managers underperformed the NZX20 (including imputations) benchmark over the last 10 years, according to a recent S&P Dow Jones Indices (S&P DJI) analysis, while about half fared better against Australasian benchmarks for the same period.
Anu Ganti, S&P DJI index investment strategy senior director, showcased the findings in a recent NZ financial adviser roadshow with passive management firm, Kernel Wealth – albeit under a proviso of enhanced statistical uncertainty given the small sample size of the local market.
The analysis took in 62 ‘unique’ NZ-based active funds in total covering 24 pure NZX strategies, 26 Australasian share blenders and 12 Australia-only options.
Ganti said the Australasian share fund category – a popular strategy for NZ managers – was “particularly at risk of sensitivity to the choice of benchmark chosen”.
While the NZ results vary across timeframe and market exposures, the tentative data adds to the global S&P DJI research that typically finds active managers underperform overall.
Notably, the semi-annual S&P DJI SPIVA reports have detailed the active-vs-passive fund struggle in multiple asset classes and jurisdictions including in the US for more than 20 years.
And last year active large cap US managers had the best result in over a decade with just 51 per cent underperforming the S&P500 benchmark compared to 85 per cent in the previous year. The next best result for US large cap active managers dates back to the GFC era of 2009 when 52 per cent outperformed the broader index, SPIVA data shows.
High volatility and dispersion (the gap between best- and worst-performing stocks) in 2022 “might have offered favourable conditions for skilled stock-pickers to generate risk-adjusted outperformance”.
Nonetheless, Ganti said active managers continued to face outperformance headwinds in a changing macro backdrop and the long-term structural dynamics of positive ‘return skewness’, the increasing role of professional investors and cost impacts.
Investment markets have moved on considerably from the almost cottage-industry environment of the 1960s to a highly competitive universe dominated by professionals – especially in the US.
For example, institutional investors represent about three-quarters of US share trades today compared to just 9 per cent 60 years ago. Over the same period the number CFA charterholders, Bloomberg terminals and exchange-traded funds have gone from zero to at least 160,000, 325,000 and US$10 trillion respectively, Ganti said.
Since 1996 she said the shift from active to passive funds, which accelerated post GFC, has generated cumulative cost savings of more than US$400 billion.
Meanwhile, Kernel has released an updated version of its 2020 offshore equities tax guide for NZ investors. Published ahead of the recent tax hike for trusts from 33 to 39 per cent, the revised Kernel guide adds a comparison with listed UK investment trusts – a still-popular structure for many NZ advisers – and a new fixed income analysis.
“We see that a non-PIE structure reduces the [fixed income] investors return from 0.1% to 0.55% for tax rates between 30% to 39%,” the Kernel guide says.
The study supports the use of portfolio investment entity (PIE) vehicles for all assets, including bonds, in most scenarios for NZ investors.
In general, the report says “a direct holding unlisted NZ PIE provides the greatest certainty and least amount of associated cost”.
“There are always scenarios that can be constructed where another method might have advantages, but the disadvantages and effort required especially over longer periods should be carefully considered.”
The Kernel tax guide was produced in associated with consultancy firm, MyFiduciary, and chartered accountants, Johnston & Associates.