Somewhat against global trends NZ active fund managers have a long history of index outperformance but a new academic study has thrown some light on why.
The research published by the CFA Institute Asia-Pacific Research Exchange (ARX) last week links NZ active manager benchmark-beating feats to macro-economic timing asset tilts.
In an analysis of institutional fund manager returns over almost 25 years, the Auckland University of Technology (AUT) study found active outperformance is closely linked to underlying economic policy uncertainty (EPU) in the local market.
According to the AUT research, local fund manager outperformance over 1997 to 2021 is correlated to a new measure of NZ EPU (based on media reports) constructed for the study.
“Specifically, we find that funds with lower (higher) sensitivity to NZ EPU index generate significantly higher (lower) subsequent excess returns,” the paper says, with a “statistically significant” annualised gap of 6.7 per cent between the best- and worst-performing portfolios.
“… we directly examine if the fund managers take advantage of the return predictability by displaying superior macro-timing ability. We find that active fund managers time the changes in NZ EPU in order to generate excess returns however passive fund managers do not do so.”
The study found no link between fund performance and global EPU, suggesting local managers are making savvy asset tilts based on NZ-specific conditions.
After stripping out those with incomplete data over the January 1997 to March 2021 period under review, the final sample covered 891 funds (including 559 survivors with the remainder closed or merged) totaling almost US$250 billion,
“We observe a significant increase in the percentage of dead funds post 2007, this is consistent with the evidence that globally institutional investors experienced a poor performance during [the global financial crisis],” the paper says.
The study also found that fund correlations with the NZ EPU can predict returns for up to 12 months ahead.
“Our study has wide implications for regulators, institutional investors and policy makers alike to determine the macro-economic shocks on asset returns,” the paper says. “Additionally, our indexes contain relevant information which could be useful to policy makers and academics worldwide, including the NZ academia and finance industry.”
The study lists AUT finance academics Sara Ali, Ihsan Badshah, Riza Demirer and Prasad Hegde as joint authors.