KiwiSaver: Why active management can be better when the markets drop

Your KiwiSaver money is invested in the financial markets, meaning it’s subjected to the ups and down of market volatility.

Your KiwiSaver might have dropped in value lately – this is the reason for it. But it’s not a cause for concern, as your balance should rise again over the long term.

We are starting to hear more about active and passive management of Kiwis’ KiwiSaver money. But what impact does that have on your balance?

What is active and passive management?

Your KiwiSaver provider will have chosen to manage your money actively or passively.

Active management is where a manager looks closely at shares or other investment types, like bonds, and makes educated guesses about which will do better than the market.

Active management means there’s a person behind the decisions made. A real human!

If the markets are rough, managers might be able to spot the incoming storm and either avoid it or skilfully navigate it. They have some control.

Meanwhile, passive management tracks a major market index as closely as possible, so as an investor you’ll get close to what the market does. No one is trying to beat the market, regardless of market conditions.

You will probably pay more for active management because it takes more effort, and more people, to invest that way. It’s important to know what fees you’re being charged because if your manager is doing better than the market, the fees eat away at the benefit you get from that. And if your manager is just keeping up with the market, higher fees mean you will do worse once they’re taken out.

Is your KiwiSaver provider active or passive?

KiwiSaver providers that manage their funds actively, with an investment team, usually like to tell their members because it might give them more weight or credibility. If you’re not sure, ask your provider. They should be able to give you this information and explain it simply to you.

But which is best?

Some say passive management is bad in rough markets because when markets go down, passively managed money can do nothing but follow them. There’s no doubt an active manager with genuine skill and discipline can prepare better for crises, and have more flexibility to do the right thing when it hits.

At JUNO, we believe we are a skilled and disciplined active manager. For example, during October, we looked at the market volatility and thought KiwiSaver balances could drop. So, our investment team raised cash levels within funds, to help safeguard your money. A provider with passive management may still be able to make these types of adjustments but, if they do happen, they’re likely to be smaller and take longer. Often because another, much larger manager possibly based overseas is actually investing the money.

 

But they’ve got to be a good active manager

Not all active managers are successful all the time, or even most of the time. So your provider claiming to be active does not guarantee you will do better than the market or passive managers. Generally, all it guarantees is you will pay more in fees. Find evidence your fund manager is thinking carefully about what the markets might do, what tools they have to anticipate and respond to market changes, what their plan would be in a big correction or recession, and are they experienced? Call up your provider and speak to a real person.

Passive might still be okay for you if your money is in the right fund – meaning it suits your investment period and how comfortable you are with bumps and losses – and you’re not paying too much.

For an investor, passive management is your starting point because it’s generally cheaper. The only reason to choose active management is because you believe the active manager will do better than the market after fees because they also have low fees, are skilled at what they do or, ideally, both.

Published November 2018

Story by Claire Connell, JUNO, and Paul Gregory, Pie Funds

Paul Gregory is the Head of Investments at Pie Funds Management Limited. Pie Funds Management Limited is the issuer of the JUNO KiwiSaver Scheme. You can read our Product Disclosure Statement here. This article is general in nature only and has not taken into account any particular person’s objectives or circumstances. Before relying on it, we recommend you speak with a financial adviser. All content is correct at time of publication date.