Start-up KiwiSaver firm Kōura Wealth has taken aim at a recent Kiwi Invest paper extolling the virtues of active management.
In an ‘open letter to NZ’s active fund managers’, Kōura founder, Rupert Carlyon, disputes the Kiwi Invest findings that passive fund investors “are going to be disappointed in the long run”.
The letter says “the same research reports” used in the Kiwi Invest study – authored by senior investment strategist, Steffan Berridge – can also be repurposed in support of index-investing.
According to Carlyon, the 2017 S&P SPIVA report quoted in the Kiwi Invest analysis comparing active funds to index returns supported the case for the long-term underperformance of actively-managed US equity products.
Kōura carried out a similar analysis of KiwiSaver growth funds to garner a NZ perspective on the issue – only over a five-year period, however.
“Looking at the largest KiwiSaver growth funds, we saw that none of those funds had outperformed their benchmarks over a 5-year period and on average they had under-performed their selected benchmarks by 0.88% over this period (significantly more than the average passive fees),” the Kōura letter says. “Yes, passive managers do under perform the market as a result of fees. However, the research above shows out that the size of the under performance by active managers seems to be significantly greater than the under performance as a result of fees in the passive approach.”
Carlyon also disputes the Kiwi Invest conclusion that passive fund investors could face outsize losses during a market downturn. He says a researcher cited in the Berridge paper found the average US equity manager underperformed the benchmark by 1 per cent during the 2008/9 global financial crisis.
“To us, how a fund performs in a downturn is the ultimate test of risk management and its clear from this research that the average active fund manager still underperformed the market,” the letter says.
Berridge argues in the Kiwi Invest paper that the passive fund industry is now driven by “conflicted agents” looking to spin the index story into flows “without necessarily looking to innovate or deliver any additional value to their clients”.
However, Carlyon say the “evidence is pretty clear” that index investing offers a compelling case over the long term.
“We can see that both internationally and domestically here in New Zealand, most investors would be better off in a passive investment fund rather than in an actively managed investment option, especially when it comes to their KiwiSaver where investment horizons are typically very long,” the letter says. “We acknowledge and agree that there will always be active fund managers that outperform the market, though the research shows that this is generally over the shorter term.”
Officially launched earlier this month, Kōura offers a range of six risk-weighted funds that give passive exposure to global equities, NZ shares as well as local fixed income and cash. Kōura outsources the international shares component to environmental, social and governance (ESG)-flavoured BlackRock exchange-traded funds while local broker house (and part owner) Hobson Wealth manages the NZ assets.
The scheme also offers a robo-advice service to help members build risk-appropriate portfolios.