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 balance might drop in value from time to time. 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 are people behind the investment decisions - real humans!

If the markets are rough, like during Covid-19, 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. And after fees and tax, you could get even less than what the market does

You might think you’ll pay more for active management, because it takes more effort, and more people, to invest that way. But at JUNO you won’t pay more. 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.

The market dip during Covid was an example of where our active management resulted in great returns during a very volatile period. Our investment team could use tools like raising cash levels and hedging to help protect your KiwiSaver balances. They also used their experience to buy and sell shares based on Covid trends. For example, buying into industries that were booming during lockdowns - like meal kits.

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.

A reason to choose active management could be 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. 

   

Information correct as at July 2021. Pie Funds Management Limited is the issuer and manager of the JUNO KiwiSaver Scheme. Click here for our Product Disclosure Statement. Any advice is given by Pie Funds Management Limited, and is general only. It relates only to the specific financial products mentioned and does not account for personal circumstances or financial goals. Please see a financial adviser for tailored advice. You may have to pay product or other fees if you act on any advice. As manager of the Scheme we receive monthly fees that are determined by your balance and whether you are 13 years or over. We will benefit financially if you invest in our products. We manage any conflicts of interest via an internal compliance framework designed to ensure we meet our duties to you. For information about the advice we can provide, our duties and complaint process and how disputes can be resolved, visit www.junokiwisaver.co.nz. All content is correct at time of publication date, unless otherwise indicated. Past performance is not a guarantee of future returns. Returns can be negative as well as positive and returns over different periods may vary. Please let us know if you would like a hard copy of this disclosure information.