Gareth Morgan on KiwiSaver (Part I)

Investing

Personal finance editor Amanda Morrall talks to Gareth Morgan about KiwiSaver, wealth preservation in an low-growth environment and greed

10th Oct 11, 12:47pm by Amanda Morrall

By Amanda Morrall

Part I of a three-part exclusive interview with Gareth Morgan of Gareth Morgan Investments.

Q) Who manages GMI's KiwiSaver money?

A) We have an investment strategy team of eight people; a couple of economists, a couple of equity analysts, a couple of fixed-interest people and a couple of quants (quantitative analysts), plus me.

Q) Do you use any external managers?

Right now if we take our KiwiSaver growth fund, a quarter of the portfolio is in managers, another quarter in index trackers and then another half in individual stocks.The way we go about investing is asset allocation, it is our biggest call. On any one day deciding how much of a dollar given to you to invest is put into the market. Currency is the second one. Investment teams and finally securities. We have prudential limits on what we'll put in, so if one goes over we'll get a bruise but we won't lose an arm. In terms of the criteria for buying an investment and why we'd use a fund manager over direct investment, it comes down to market efficiency. If we have identified that some market in Asia looks set to go, the next question is how do we get exposure to that market. Do we go and buy stocks directly on the local exchange or go through a manager that specialises in that area or theme. It's a case by case. If we find a manager that has good fees, and a good philosophy then we'll use a manager.

Q) What is Gareth Morgan Investments' philosophy?

A) The first thing for us is wealth preservation. That's No.1, even for the growth portfolio. Enhancement is No.2 We have a big sign on our office wall that says don't lose the bloody stuff. The reason for that is that these portfolios are peoples' lifetime savings and they're likely not to have a chance to rebuild them if you smash them. That's why the portfolios are so diversified. I always say to people: 'Don't think you're going to make a lot of money investing in these type of diversified portfolios. You won't. You make money in your day job or you concentrate portfolios to make but with that comes far, far greater risk.' We're looking after peoples' long-term savings so I think it's totally inappropriate to be playing little segments of the market with peoples' KiwiSaver funds.

Q) What, if any, adjustment have you made to your portfolios recently?

A) Since KiwiSaver began in 2007, we've had the GFC and now we're having the second leg so those are two big thumps. For 2008, the portfolio that was mandated 100% growth, went through that period with about 45% invested, the other 55% was in cash. We had total discretion on the conservative side of clients' mandate to do what we like. If we are really scared, we can go completely to cash. But if a client has mandated that they want 80% growth, we can't go to 83%. We have to rebalance. So that's why we tend to do better in downturns because we tend to be under weighted in equities. The highest we've ever been (for a 100% mandated portfolio) is 92%.

At the moment, the 100% growth is 77% invested. This time three months ago is was 85%.

Tomorrow in Part II of our interview, Gareth will discuss benchmark performance and GMI's decision not to participate in peer comparison tables.

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11 Comments

by AndyC | 10th Oct 11, 2:22pm 1318209744

I may be about to join them.

I havn't been that happy with their investment approach for the fund I am in (growth). When the crunch hit they shifted significantly out from equities, and were then slow to get back in. This resulted in realising the losses and missing the "rebound" in the market. Perhaps this is symptomatic of what Gareth was saying about protection from a total wipe-out is paramount?

As far as I was concerned I invested in a growth fund and EXPECTED to ride the ups and downs of the market. By bailing from equities this wasn't able to happen. I guess the conclusion I can draw from this is that Gareth's investment style doesn't quite match my desires.

Amanda - if memory serves you once suggested that you were going to be looking into allowing kiwisavers to have their funds spread across multiple managers (you had a term for it, but I forget now). Just letting you know that there is at least one person out there still interested in this.

by Amanda Morrall | 10th Oct 11, 2:35pm 1318210500

That's a frighteningly good memory you have. Yes, it's called "Open architecture'' you can do this is Australia but not here yet. I expect when we're a little longer into the experience there may be more demand Perhaps I'll tackle it as a Q&A. Would you mind flicking it through via our Q&A autoforms.

Cheers,

Amanda

by Mark Hubbard | 10th Oct 11, 1:48pm 1318207696

I couldn't bring myself to watch this without breaking something, so enlighten me, humour me, what does he say about greed?

(I'm assuming it's not about his greed for my earnings and asset value, that is, my efforts from which I would have liked to save something, in the form of the Big KaTaker).

by Amanda Morrall | 10th Oct 11, 1:50pm 1318207846

Actually, sorry the greed bit was a teaser. It's in reference to growth funds, which Gareth describes as funds for the "greedy.'' That's me.:)

by andyh | 10th Oct 11, 1:44pm 1318207476

Whats that odd thing hanging down on the right side of Ms Morrall?

by David B | 10th Oct 11, 2:37pm 1318210629

I just went to Morningstar's latest quarterly kiwisaver performance survey to see how GMI is doing, wrt the other providers, but I couldn't see any information on them. Does anybody know the reason for that?

http://www.morningstar.co.nz/s/documents/kiwisaver_survey110721.pdf

by Amanda Morrall | 10th Oct 11, 2:41pm 1318210860

The backstory is well published but we revisit the issue in Part II and III tomorrow and Wednesday.

Short answer is they don't participate because Gareth doesn't believe it's accurate or objective.

Here's the link to GMI's website, which compares their performance to a benchmark of their choosing.

http://www.gmi.co.nz/Kiwisaver/

by David B | 10th Oct 11, 2:55pm 1318211708

Thanks Amanda. Well I have to be honest with you, that's just another reason why I'm glad I'm not in the Gareth Morgan Kiwisaver scheme!

by Roadhouse Blues | 11th Oct 11, 3:50am 1318258247

The idea of Gareth's is sound and flawed at the same time because the number 1 and 2 best performing assets over the current 5 years or even 20 year periods has been gold and silver.

I mean what is his bull pick over the coming 5 years? Other than to say wishy washy statements like we want to preserve funds while aggressively targeting growth.

The idea that you can give your hard earned savings over to somebody like Gareth and sit back while his team 'gamble' your future away taking a percentage of the profits in good times and a salary in the bad times is for no better word stupid.

The fact is that the Government gives me a subsidy to play and my employer kicks in a contribution and without these subsidies the scheme wouldn't work for the majority.

Really it reeks of the government propping up their pals in the investment sector when the majority of "investors" would be far better of if they could afford to own their own home by the time of retirement as no amount of savings will compensate for this.

by Black Celebration | 11th Oct 11, 8:15am 1318274133

Great interview Amanda,

The good thing about the videos is that someone cannot be quoted out of context.

There are mixed messages here - even for the Growth protfolio Gareth tells us "don't think you're going to make money" and "it's all about wealth preservation". If they rebranded GMK funds, their investors won't have this annoying idea that they should be making money. He is plainly getting grief from his customers and these are his responses. Not an investment philosophy, as such.

Further, the day job for most people is to pay bills. You put a bit aside to get ahead some time later down the line.

It's OK to think differently and be all maverick, but Gareth is in danger of going a little overboard on that. People have every right to expect growth from a growth fund. If you try to make them feel stupid for that expectation, then I think things are getting a little skew-wiff.

by aeroncs | 11th Oct 11, 3:26pm 1318299991

I had a similar experience as AndyC when I was in the growth fund. They were taking my money in when the market was dropping and not investing it as I would have expected. I was in the growth fund for the long term growth and realised that there would be ups and downs but was welling to wear this risk with expectation that over 30yrs it would all wash out.

I even went as far as contacting them when the dow was at 8000 and asking them why they were not investing?

Next thing was that I raised with them when the NZ currency dipped below 60 cents why they did not hedge a portion of the offshore currency back into NZD. There were 2 clear reasons to do this 1) when you run interest rates alot higher than the world and continue to borrow then currency appreciation occurs and there is a interest rate benefit from the forwards market for doing so. Eventually they started to do it but again it was too late, they missed the boat.

I was once a fund manager and I actively managed currency hedging as the cornerstone of our off shore stratergy and it enhanced returns despite our critics saying that it was not to be done. As well as enhancing returns it also had the effect of reducing risk (better returns and lower risk, why wouldn't you do it).

Anyway, my opinion of the current crop of fund managers is low as they are all like a flock of sheep, they are all too scared during times of uncertainty and sell or buy well after the market has moved e.g buying at the top and selling at the bottom e.g look into when GMK sold BP shares and bought GOLD positions.

You are better to invest in cash term deposits for the long term as there is no fund manager who performs better than this asset sector over the last 20 years. Check it out some do o.k over a short 2-3yr period then they implode.