Our chosen investment strategy

“Smart-beta” is an investment style that follows an index and is designed to take advantage of the markets systematic performance biases.  Passive fund managers and exchange traded funds fill this domain.  Growth stocks versus value stocks.  Large versus small.

“Alpha-generating” investments are the domain of active fund managers who are looking to exceed their own benchmarks (performance measures) or market benchmarks such as the S&P 500 or the NZX50.  They attempt to pick stocks and time, buying/selling.  The fees for the latter are greater than the former.

At FSB⁴ Financial we were disappointed by fund management performance through the early 2000’s, also disillusioned by fund manager behaviours which we felt were becoming problematic to our investors.  The global financial crisis topped it off.  Since 2008 we have systematically transferred our existing clients into asset class, smart-beta investing and directed most new and KiwiSaver investors into the new strategy.  A philosophy focused to academic rationale, less cost and a transparent and consistent procedure – not to mention asset class mean reversion (historical long term performance).

The funds management industry is relatively new in NZ.  Up to the mid 1980’s regulation  constrained global share and bond trading.  Stock brokers traded NZ shares, Insurance companies sold ‘Savings and Investment’ products.  The Unit Trust industry emerged when international markets were opened in the 80’s and fund managers began to proliferate into portfolio design.  Distribution relied predominantly upon insurance industry personnel and a slowly developing financial advisory industry with ‘investment’ advisers.  But the growth of the retail funds management industry was slow and in 1987 the share market crash frightened the investing public who were tip-toeing into international and NZ share funds, direct or within managed funds.  Insurance companies appointed their own funds management teams and distribution was directed through the insurance advisory force, the majority of whom didn’t know the difference between a bond or an equity and certainly didn’t understand volatility or risk.  These savings and investment contracts were top heavy with fees because the only way the insurers could sell the products was to pay high commissions to their sales staff.  They sold lots. Mostly personal super plans.

In time the funds management industry evolved and reasonable performances were being delivered by various investment teams around NZ.  But the market being small meant the investment personnel who were any good were becoming hot property.  This continues today and is one of the major inhibitors of long term investment out-performance in the NZ market.  Fund managers lose their best personnel either overseas or to their competitors.  Alongside the evolving funds management industry in NZ grew research houses and ratings agencies.  Most have now departed from the NZ market – representation and communication emanating from Australia.  The major banks in NZ  purchased many of the insurance companies along with the smaller provincial NZ banks.  This trend has started to reverse as boutique banks NZ emerge to provide unique products and services, but the Australian banks overall control both the NZ insurance and retail and wholesale investment markets.

The SBS bank is an exception, an example of a joint venture.  A service offering to independent advisers.  It offers nine portfolios ranging from a 20/80 growth/income split to a 98% growth / 2% income split.  Consilium (its joint venture partner) arranges the portfolios through international fund managers  Dimensional and the SBS Bank administers the compliance.  FoxPlan will use this service.

When the global financial crisis hit NZ  it exacerbated a market already affected by the collapse of the finance companies and the inception of KiwiSaver.  The GFC was a big issue for many established investment advisers because much of their portfolio allocation into ‘income’ assets was directed through ‘high performing’ debentures.  The research houses such as Morningstar were recommending more and more debentures along with the toxic ‘collateralised debt obligations’ and collateralised loans.  The market fell on its face overnight.  Fund managers disappeared.  Research houses took a knock from which they have never really recovered, heading back to Australia along with various ratings agencies.  The banks took over the market and now own the retail space through KiwiSaver.  65% of KiwiSaver funds are under bank direction.  Banks also own the advisory space for investors.  Most qualified financial advisers are employed by banks.  The few impartial investment advisers such as FoxPlan are free to determine: a) their fund managers b) their portfolio designers c) their custodial platforms d) their investment philosophy and service offering – but this is not the norm.

FoxPlan has chosen these offerings deliberately and after much due diligence.  It’s pleasing to see the emergence worldwide of similar rationale.  The growth of passive and index investing, the proliferation of exchange traded funds (index investing) and the transition from active to passive funds management.  A recent report out of the US shows 5 year performance (underperformance) for various countries.  Canada, Europe, US, South Africa, Australia, Mexico, Chile – all ‘out performed’ by their benchmark over 80% of the time.  In other words active fund managers are not consistently delivering fund outperformance.  Their higher fees making for an overall worse outcome than passive funds.

Smart-beta passive investing is consistent (not affected by personnel changes) academically proven, takes advantage of market biases (such as small stock, value stock out performance) has less cost in fees and brokerage (it trades less and doesn’t pay exorbitant fund manager performance fees) is available on custodial platform (third party compliance and tax efficiencies) is transparent and diversified.

Whilst the seven years we have been aligned in this arrangement is not a seriously long time frame within an investment strategy – we and our clients have had no surprises and the service has exceeded the promises.