Show us the money

Are you buying your Kiwisaver fund manager a Porsche? Rob Stock looks at the fees transparency move that might shock some contributors.

From this week, all Kiwisaver account statements must for the first time show the fees paid by savers to their fund managers in dollars and cents.

It’s a move predicted to unsettle many savers, who up until now have seen fees presented only as confusing percentages of the amount they have saved.

Many in the Kiwisaver industry see this as a watershed moment that could prompt a lot of savers to ask whether they are getting value for money.

It could also drive greater interest in the debate that rages over high-fee ‘‘active’’ fund managers, and low-fee ‘‘passive’’ managers.

The active Kiwisaver schemes such as Summer, Milford, Fisher Funds, Booster and Generate charge relatively high fees, and aim to earn them by using fund manager skill to beat the market.

Their fund managers research companies, and markets, and try to earn high returns by picking winners, and avoiding losers.

Figures from fund researcher Morningstar show that an activelymanaged balanced fund may cost savers as much as $36 in administration fees, and 1.2 per cent of their fund value each year.

On the other side are the passive fund managers such as ASB and Simplicity.

They will not beat the market because passive investors do not seek to beat markets, but merely to mirror them, and will underperform the markets they invest in by the amount they charge in fees.

Their argument, based on overseas research, is that active managers do not, over the long term, tend to outperform markets, so the best course for investors is to keep costs low, and go passive.

Morningstar figures show the Simplicity Balanced Fund costs $30 in administration fees and 0.31 per cent in management fees.

Both the active and passive managers argue that they are the best, highestreturn long-term bet for Kiwisavers.

Martin Hawes from Summer said active management made sense for Kiwisaver schemes where a large chunk of savers’ money was invested in New Zealand shares.

Unlike the heavily-researched

US, UK and European sharemarkets, the NZX was relatively ‘‘inefficient’’.

That’s a term that means company share prices can end up being too high or too low for longer periods of time than on more efficient markets, giving fund managers here more opportunities to buy when prices are low, and ditch, or avoid, overpriced companies.

‘‘New Zealand’s not a big, efficient market, and therefore there are pricing anomalies which a good active manager can take advantage of,’’ Hawes said.

Part of the reason was that about half the money invested in the NZX was overseas money, deployed by overseas managers who lacked the local networks and insights of local active managers.

‘‘A good New Zealand active manager beats those people,’’ Hawes said.

12.5 per cent of Summer’s Balanced fund was invested in New Zealand shares, but there is also money in New Zealand listed debt and listed property,

he said.

Morningstar figures show the figure for the entire Kiwisaver market to be about 12.7 per cent in Kiwi shares and listed property.

There’s another reason some opt for active managers.

Milford portfolio manager Mark Riggall said the ‘‘passive investment’’ approach would not handle share market volatility well, and it would be tested hard when more turbulent market conditions emerged.

Active managers such as Milford are able to decide to pull money out of markets, and hold it in cash, giving them a chance at avoiding or reducing losses in a falling market.

Some will even take out ‘‘put options’’, which allow them to profit if markets fall.

This approach, Riggall said, ‘‘has delivered better risk and return outcomes for our investors. The evidence for the success of the approach is that a lot of our investment funds are number one versus their peers across multiple time frames.’’

‘‘Up until now, the passive management style hasn’t been tested in a real downturn. When it is, I think we’ll see that it’s not an approach tailored to trying times.’’

Simplicity Kiwisaver founder Sam Stubbs said active fees were just too high, and most of the roughly $300 million a year being charged in fees was simply going to scheme providers’ bottom lines.

Fund managers might get Porsches, but research showed that over longer periods of time, active managers did not generally outperform markets.

It has also been an uncomfortable truth that active managers have been earning larger and larger profits as their funds under management have grown, as they calculated their fees based on a percentage of the funds under management.

Hawes said some large Kiwisaver schemes were actually ‘‘closet’’ passive fund managers, sticking quite close to indexes, while charging active-level fees.

They had what was known in the industry as a low ‘‘active share’’.

In time, Hawes would like to see schemes publishing figures showing how active they truly were.

Fee transparency may prompt many Kiwisavers to react, and start looking around for a better value fund to switch to.

But Hawes said people should get something else straight first before working out their position on their active/passive debate: their investment mix.

Far too many people appeared to be in low-risk default Kiwisaver funds stuffed with low-return bonds and cash.

‘‘The very first thing is to use the online risk calculator on Sorted to work out if you are in the right kind of fund,’’ Hawes said.