Diana Gordon argues there's a big opportunity in NZ fund managers being prepared to invest KiwiSaver money offshore and manage it from NZ

Diana Gordon argues there's a big opportunity in NZ fund managers being prepared to invest KiwiSaver money offshore and manage it from NZ

By Diana Gordon*

I was sitting on the Eastbourne ferry last Friday chatting to my friends on the top deck as we slipped home across the harbour.

One of my buds is a mad professor-type who gives seminars from home on a programming language, R, (which was incidentally developed in Auckland) to researchers round the world.

Beside me was a maths PhD and Fulbright scholar who is the CEO of a company that wants to be what Xero is to trust funds globally.

Opposite me was a fellow Scot who is a global authority on power stations - he literally helped write the manual that is used throughout the world.

All incredibly bright and thoroughly decent guys. As I was sipping my beer, watching the sun set over Welly, it suddenly came to me how strange it was that so many of my colleagues in the fund management industry think we can’t run global investments here.

If my mates can do it, why can’t we?

The arguments I commonly hear are, “Can’t be done. We are sticking to NZ assets. We might not get much diversification but we know the companies”.

There’s also a slight undertone that it’s somehow not patriotic to put KiwiSaver assets into foreign companies.

I’m relatively new to these shores so I’ve usually been stopped in my tracks when fund managers have expressed such an opinion.

I don’t want to be presumptuous. But then I thought, “Can’t be done?  Why do they think that? Is it that we lack the people, the systems, the information? Is it the time difference?”

Well that’s odd since my firm - and actually a few others - have been investing globally for years from NZ.

There are a steady stream of Kiwis and expats wanting to come to NZ who have experience in the big financial centres who would give their right arm for the ability to live and do what they do here.

When I started in the business (cough) over 20 years ago, we used to receive company news via fax. Now we get it the same time as everyone else on the planet. Put it this way, those hedge funders in Queenstown aren’t getting their information by carrier pigeon.

Yes, there are issues with time differences which mean you sometimes have to get out of bed to work at unearthly hours. My week sometimes officially finishes on Saturday morning, but then, hey, I get to live by the sea amongst incredible beauty. Not such a bad trade-off. And yes, you sometimes have to get on a plane. But not much more so than if you were, say, running money from Cincinnati.

And even if we wanted to keep the world as it is, the truth is it’s changing for New Zealand fund managers.

That fund manager in Cincinnati can do her analysis on Fonterra or Mighty River Power too. Fonterra is more than happy to issue private bonds to US managers and increasingly Kiwi companies are raising funds overseas. She gets to diversify her risk for her clients at a price that is attractive to her.

It is no more unpatriotic for Fonterra to issue at the best price abroad than it is for us to buy what we think are the best foreign assets for our Kiwi clients.

Our view is that Kiwis already have a huge amount of risk in New Zealand.

They have their jobs, their property and farms etc, and no doubt there are some unique risks to living on these magnificently beautiful but shaky islands.

And even if we wanted to only own Kiwi assets, the fact is that KiwiSaver is NZ$21.4 billion (as of March ’14) and that’s likely to treble or quadruple over the next 10 years. There is no way that the stock and bond markets in New Zealand will grow remotely fast enough to put all this money to work.

In fact, nowadays a fair chunk of your KiwiSaver money is already offshored to foreign managers.

That’s not such a bad thing, as we can’t do everything here.

But rather than pay away hundreds of millions in fees to foreign managers, we could act to develop the fund management industry here and keep a good proportion of those fees onshore.

The more assets run directly in New Zealand, the more likely KiwiSaver fees will be reduced as the directly run asset pools grow. Kiwi graduates get a toe-hold into good jobs. Everyone wins.

What is needed is an understanding by the politicians of the scale of the opportunity. And a bit of belief in Kiwi ingenuity.

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Diana Gordon is the Fixed Interest Portfolio manager on the Investment Strategy team at GMI/KiwiWealth in Wellington.

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Diana is absolutely correct.   And that we are having such a discussion is an outcome of working with assets we own, rather than the Kiwi disease of working with large debt.
So congratulations to Kiwisaver, with it's $20 billion - and expanding.  And congratulations to the Super Fund.  We should focus on increasing the contributions to both as a national priority.

Rather than have a fund manager creaming off 1% of my wealth each year, I would rather pay into passive funds which track indexes of international shares and pay 0.25% or less. The first person to set one of these up in NZ will get my money.

I agree, same with sovereign debt, possibly.  It's impossible to run a foreign cash fixed interest book from NZ - access to RP/futures/OTC hedge instruments (swaps etc) would need all night vigils - so I guess the author is talking about a local manager of foreign managers type investment situation - too much fee slippage.

Yes, a number of index trackers and ETFs would be useful - equities, government debt, corporate debt, commodities.
 
A lot of the managers here just buy these types of funds oversees from DFA or Vanguard then whack a hefty fee on top - these are only active in the proportions the managers choose to buy. I would rather choose these proportions myself based on a risk profile I am happy with.

All Diana says applies to individual investors too. There is the bogey of FIF but by investing sufficent in high income shares that can be overcome or you can accept that you need to pay on a notional 5% income and take the capital gain.
As an example on an average day the London market has tens of significant movers and lots of interesting news events which are easily gleaned using the various sources and analytics published at low or nil cost.
Example overnight 15 shares from the FTSE350 (top 350 main board shares) had gains exceeding 4% and in the other direction 6 shares fell 4%+ in a rising market.
Just scan digitallook.com for some free stuff for starters.