KiwiSaver provider Gareth Morgan on diversification, international standards for performance, long-term growth prospects

KiwiSaver provider Gareth Morgan on diversification, international standards for performance, long-term growth prospects

Personal finance editor Amanda Morrall talks to Gareth Morgan of Gareth Morgan Investments about their KiwiSaver style and strategy.

For a transcript or to watch the video interviews (part i and part ii) click the links.

Q) You reject peer comparisons so what's your measure?

A) We are the only fund manager in NZ that is GIPS (Globe Investment Performance Standard) compliant which is the international standard on investment performance; 85% of fund managers in the U.K. are GIPS compliant, 70% in the U.S., 75% in Australia. GMI is the only one in New Zealand. Ask yourself why that is the case. Why can these guys (the GMI's competitors in KiwiSaver) get away with it? (Read more on GIPS here).

The landscape is changing and with the FMA (Financial Markets Authority) here now they'll all have to conform. For me in terms of credibility with my audience, I'm quite happy to use the international standards. But I'm not happy to be put into a slew that is self-serving the masters that pay them. Which is the Morningstars of this world paid for by the industry.

Q) Morningstar rejects this criticism and argues strenuously that they are objective.

A) They're not objective. They are actually in my view, they tell total untruths and I've had them on about this. You haven't got decision makers in New Zealand, they're just sales people so what happens in this situation is you just have a stand-off. It's a question of integrity and for me there's no integrity in that process.

Q) What separates GMI investment (outside of benchmarking) from the other players in this space?

A) The three things that we value pretty highly are: transparency, low fees, and diversification.

So with transparency, the client can actually see what securities they own, they can see over any one period what you've done with those securities, so they can independently verify their performance by reading the security prices on the stock exchange. We don't use unit pricing because that's a smokescreen behind which a whole lot of funny business can occur.

The portfolios are diversified because these are long-term portfolios. If I wanted to make a quick buck, for the clients, and I go in and put all the money on a couple of stocks and off they go the other way and boy we have a good time, but I think that's totally irresponsible. We're very much a tortoise in our investment style. And our fees are low. I think that's unique for a fund manager to have all three attributes. Some are better than us on fees, nobody is better than us on transparency and some are equally diversified to us but no one has all three attributes.

Q) Ten years from now where would you like to see GMI KiwiSaver funds?

A) Definitely up for everybody. I would like to see, for given volatility, that we continue to outperform the market benchmarks. I'll be very happy if that's the case.

(Eds: Morningstar offers the following rebuttal in its defence):

"It is clear to us that Gareth Morgan does not understand Morningstar’s business. We are a staunchly independent research firm and do not accept payment from fund managers for research reviews – such as KiwiSaver – or our fund awards. We operate a user-pays model. Advisers and investors pay a subscription to access our research and like-wise if a fund manager wishes to promote a research report there is a cost involved here as well. We are a publicly listed company, so anyone can see that and the majority of Morningstar’s revenue comes from areas such as licensed data, investment research and investment software."

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Alot of nice words.

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.

Should Mr Morgan be correct in his assertion that the standoff with MorningStar is based on integrity; then the matter becomes a bell weather, a canary in the mine.

If a company can continue without integrity, that would mean our laws and institution are insufficient for the weeding out of con men and those who prey on the vulnerable without mercy.

I hope he is wrong but if he is not - a standoff is not an acceptable outcome.

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