Vanguard has lost another major NZ mandate in the wake of the responsible investment industry retro-fit with the government-owned Kiwi Wealth switching more than $660 million to its new in-house global equities fund.
Last year ASB swapped Vanguard for BlackRock as manager of its $1 billion plus offshore shares portfolio as KiwiSaver managers scrambled to defuse growing public pressure to remove exposure to controversial weapons manufacturers in vanilla passive funds.
Simon O’Grady, Kiwi Wealth chief investment officer, said the firm had already shifted the approximately $662 million international shares allocation to the just-completed responsible investment fund.
O’Grady said the Wellington-based Kiwi Wealth, which has more than $3 billion in its KiwiSaver scheme, did not want to rush out a responsible investment solution despite growing public criticism last year.
“We looked at the off-the-shelf [responsible investment] options but tax inefficiency – particularly with Australian-based funds – was a major problem,” he said.
Kiwi Wealth estimated NZ investors could be losing as much as 20-50 basis points in tax slippage through Australian-domiciled global equity funds.
According to O’Grady, Kiwi Wealth also wanted to avoid some of the “inherent biases” of cap-weighted index funds such as exposure to momentum trends or missing out on the risk premium offered by smaller stocks.
He said typical passive funds also don’t allow investors to apply research insights “at the stock-level”.
The Kiwi Wealth global shares fund, O’Grady said, was expected to add “50 basis points” per annum over the long term compared to a standard index fund via its bespoke in-house process, in addition to the tax uplift of 20-50 basis points of an NZ-domiciled vehicle.
He said JP Morgan Asset Management has been appointed to look after the “stock-level implementation” for the new Kiwi Wealth fund.
The fund also features a three-phase responsible investment process, O’Grady said, starting with exclusion screens based on the NZ Superannuation Fund list of banned companies.
“The next level down we look at companies in sectors that are likely have to have [ESG] problems – such as nuclear, defence or palm oil industries,” he said. “We will exclude these companies unless they can demonstrate strong corporate processes – we want to reward those firms doing well in improving practices.”
Finally, O’Grady said the Kiwi Wealth responsible investment regime will screen out “any company in any sector” that displays poor corporate behaviour.
In total, the Kiwi Wealth global equities fund has sifted out about 150 stocks including: 120 or so tobacco-related firms; and, 30 controversial weapons manufacturers or poor ESG companies.
Meanwhile, the Medical Assurance Society (MAS), which manages over $1 billion across its KiwiSaver, traditional superannuation and insurance fund pools, is also set to introduce major portfolio changes under a new responsible investment approach.
The new MAS policy will see the manager ditch most of its – recently increased – allocation to alternative assets to implement the change.
According to the latest MAS disclosure documents, the Johnsonville-based restricted scheme, which services a medical-related client base, has cut exposure to firms that “manufacture and sale of armaments or tobacco, or the exploration, extraction, refining or processing of fossil fuels”.
“In addition, the funds will not invest in any utility that primarily burns fossil fuels,” the MAS document says. “Most alternative assets will be sold from the Portfolios. The proceeds of the sales will be used to buy International and Australasian equities.”
Currently, MAS invests more than $100 million across a suite of alternative managers including Ellerston, GMOP, LM, Maui, NZAM, Pencarrow, Salt, and Winton.
Daniel Callaghan, MAS head of investment products, said the “opaque nature” of most alternative assets meant it was difficult to ensure compliance with the new responsible policy, due to take effect in September.
Callaghan said the policy applies across all MAS funds, including its $200 million plus insurance investment pools, and asset classes.
“We have taken some time to consider the best way to meet responsible investment guidelines,” he said. “Rather than jumping on the bandwagon, we wanted to consider the views of our membership, which is heavily-skewed to the health field.”
The decision to exclude tobacco and fossil fuels was related to those health concerns, Callaghan said.
Last week Mercer also announced it would be quitting exposure to tobacco in its KiwiSaver fund.
In a statement, Mercer says: The decision to exit and cease all tobacco investments was an outcome of [a responsible investment policy] review, and follows a 2016 decision to exit investment in companies that manufacture controversial weapons
“Under this policy and as of June this year, Mercer instructed managers to divest from companies manufacturing tobacco products,” the statement says. “With the process now well advanced, Mercer expects completion over the coming months.”
Mercer manages about $1.5 billion in its KiwiSaver scheme.