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Why you should be thinking about this key KiwiSaver question for 2022

Pathfinder chief executive John Berry says active or passively managed funds is a key question for KiwiSaver members in 2022.

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Fees, returns after fees, agility in falling markets and selecting sustainable investments – each can be impacted by your KiwiSaver manager’s investment style – active or passive.

Passive investment means ‘buying the market’. For US stocks investors can use the S&P500 index, essentially a collection of the 500 largest US stocks.

These companies aren’t included in the index based on their strong growth prospects, leading technology or skilled management. Indexes like the S&P500 choose companies simply because they are the largest companies.

An index generally holds less of a smaller company, because it is small, and more of a larger company, because it is large. That’s why Apple and Microsoft are both over 6 per cent of the S&P500 and why until December 2020 Tesla wasn’t in the S&P500, meaning passive strategies probably missed Tesla’s rapid share price growth.

Choosing stocks simply based on size might sound lazy, but offshore data shows passive funds often outperform active funds in large markets like the US or Europe.

But you cannot simply transfer the experience in a large market to KiwiSaver. There’s no evidence that passive KiwiSaver strategies are overall better than active KiwiSaver strategies.

Over the last five years returns from three of the best-known passive managers – Simplicity, ASB and Superlife range from very good to average to mediocre in Morningstar’s September 2021 survey of 28 KiwiSaver growth funds. They are placed fourth, 17th and 26th. Returns of active managers are also widely distributed in Morningstar’s survey including being the highest (12.2 per cent per annum) and lowest (7.8 per cent per annum) performing funds.

KiwiSaver is different to an index for a single market. A diversified KiwiSaver portfolio is allocated across several asset classes (like shares and bonds) and across different geographies (like North America, Europe, emerging markets, Asia and Australasia).

A long-term diversified portfolio should also include investment in unlisted private companies, but there are no indexes covering these. This requires active decision-making or outsourcing to another manager.

With investing sustainably both active and passive managers can avoid harmful industries, like gambling, tobacco or weapons. But we are not going to meaningfully change the world by just avoiding harm, it is where we actually invest that makes the difference.y

KiwiSaver investments and sustainability

Younger age groups were more likely to take providers' environmental policies into account when choosing a KiwiSaver fund. Source: NowNext survey (Stuff).

There’s no doubt that passive KiwiSaver strategies are cheaper, because tracking an index is essentially automated investing and easier to manage. But fees alone should not be the focus, it’s returns after fees that really matter.

The market regulator, the Financial Markets Authority, wants lower KiwiSaver fees. It does not favour active management over passive, it just wants KiwiSaver investors to get a fair deal for fees they pay. This can be measured in returns after fees, service levels, a sustainability focus and other factors that matter to an investor.

Since market turbulence in March 2020 when Covid-19 went global, shares have risen with a few bumps along the way. Hopefully you learned over 2020 and 2021 that the question to solve first with KiwiSaver is matching your fund and your risk profile – conservative, balanced or growth. Hopefully you’ve also found that you can use tools like MindfulMoney.nz to match your KiwiSaver with your values.

For the important step of choosing a KiwiSaver manager, there are many factors to account for, a critical one being investment strategy. Active or passive investment – that’s your KiwiSaver question for 2022.

-John Berry is co-founder and chief executive of ethical fund manager and KiwiSaver provider Pathfinder Asset Management, the first B Corp certified fund manager in New Zealand which is part of Alvarium Wealth. Pathfinder uses active investment strategies.

(This article was originally published by Stuff December 31, 2022)

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