Investment industry leaders from New Zealand were gathered in Auckland last night to debate whether passive or active fund management was best.
The debate was hosted by Financial Markets Authority (FMA), on topic: ‘passive management gives investors the best outcome’.
Most KiwiSaver funds and managed funds in New Zealand favor active management, however passive management has been gaining global support.
Passive management is characterized fund managers mirroring market index or portfolio like the NZX50 or the S&P500. IF the market has 1% of a certain asset, a passive fund will then hold 1% as well. Active management, on the other hand, is when managers try to exceed the index by buying or selling the assets based on their expectations and analysis, also known as “stock picking”.
Active management is usually associated with higher fees and it is in question whether it overperforms the market indexes. However, some critiques consider the active management presenting a better argument.
FMA CEO Rob Everett said that the event was a nice way to start the decade and set everybody in industry thinking about what is turning into a defining topic of the 2020s.
Rob Everett commented:
The merits of each investment style is a debate happening here and round the world and one we want New Zealanders to fully understand. It’s fair to say New Zealanders never been more interested in financial markets, thanks of course to KiwiSaver.
Rob Everett added:
This event sets the scene for our future work on passive and active management styles, part of our value for money focus on KiwiSaver
Sam Stubbs of Simplicity, Hugh Stevens of Smartshares and Fiona Mackenzie of Jarden argued on the side of passive management and Rebecca Thomas of Mint Asset Management, John Berry of Pathfinder and Paul Gregory of PIE Funds were on the opposite side.
Some of the most memorable quotes from the evening include:
I’ve brought along my passive management toolkit (*holds up blindfold and earplugs*) – it’s for long-haul investing instead of a long-haul flight. A blindfold to select the best securities and earplugs for listening to my clients’ outcome preferences.
It’s all very well to have a great year one year but what you need to generate for your clients is persistent return year after year. [Research shows] the ability to continue performing year after year is very difficult… I noticed my colleagues didn’t bring a crystal ball – that is basically what you would need if you want to understand or predict which active managers are going to outperform.
The reality for investors in any market to have any outcomes at all – let alone best outcomes – you have to use active management. Without active investors, passive markets are stagnant, elephant graveyards. Active management makes the world go round.
If we were all passive and totally mediocre, no one would have climbed [Mount] Everest, no one would have gone to the moon and no one would have invented the wheel. History tells us the best outcomes don’t come from being passive – passive delivers zero.
We heard a great thing from John – ‘passive people haven’t been to the moon, they didn’t invent the wheel.’ Hold on, Boeing – which went to the moon – is in the index. Lockheed, which went to the moon, is in the index.
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- New Zealand FMA adds IOS Investments Limited and bacfinancelimited.com to its warning list
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