AMP's move to passive creates opportunities for active managers
Not as shocking as a global pandemic, in this year of shocks, was the decision by the AMP to become a passive investor. To the investment community in New Zealand though, it does rate as a pretty big upset.
Founded in 1849 as the Australian Mutual Provident Society, AMP is one of Australasia’s oldest and best-known companies. It has a very long tradition of being one of Australasia’s highest profile independent active investment managers.
Indeed, when the New Zealand Superfund handed out its first set of mandates back in 2003, it was no surprise that AMP was one of the active New Zealand equity managers they selected. AMP went on to hold that mandate for well over a decade.
While AMP going passive was a surprise to most, it is not a move that goes against the trend. Our afore mentioned New Zealand Super Fund has long held the belief that the most efficient way to access global equities was via passive mandates. The exception to this was their use of active managers for New Zealand equities, where they felt there was sufficient evidence of active managers being able to consistently outperform the S&P/NZX 50 index.
That was a decision made more than 10 years ago, however in more recent times there has been less empirical evidence that active New Zealand managers are able to reliably beat their benchmark.
Last year, the September 2019 AON Investment Survey was ugly reading for proponents of active equity management. For the previous five years, the S&P/NZX 50 index had delivered annualised returns of 17.1%. The survey tracks the returns of 12 active managers and the 21 different funds that they offer, in the Core Australasian Shares category.
These returns are before any fees, to make the returns directly comparable. In reality, fees will be charged that reduce the returns shown in the survey. To make the returns more real world we have assumed that investors receive 1% less than those shown due to costs incurred, such as manager, registry, custody and supervisor fees.
Once that adjustment is made to all the returns only two (one of them being the Castle Point Trans-Tasman fund) of the 21 funds listed delivered a return greater than the index. Put differently, a whopping 90% of the funds in the Core category failed to do the job over a five-year period.
So, what has changed from 10 years ago when most active New Zealand equity managers were able to deliver returns greater than the index. Conjecture can be applied here but a factor that must have been at play is the global phenomenon that has been value managers’ underperformance. New Zealand used to be a great market for value managers, the majority of companies traded at a discount to their global peers and dividend yields were one of the biggest sources of return.
A value market is going to favour a value approach. However, value turned into a real headwind in more recent times. Over the five-year period in question, the S&P/NZX 50 index has risen over 120%. New Zealand companies now trade at premiums to global peers and dividend yields were only a modest source of return. 90% of funds just could not keep up with the quality and growth juggernaut that the S&P/NZX 50 index had become.
Jumping forward 12 months, the September 2020 AON Investment Survey makes much better reading for supporters of active equity investing. Looking at the last 12 months’ return, to 30th September 2020, the S&P/NZX 50 index returned 8.3%, which would have the success hurdle for an active manager of 9.3%, before the deduction of 1% fees.
This time, 13 managers are included in the Core Australasian Shares category and a total of 23 different funds. Of those funds, 16 delivered 9.3% or more, a success rate of 70% of funds in the survey. The quantum of excess return was meaningful, on average the 16 funds, that did the job, beat the index by 5.2% after fees are accounted for.
There will be many factors at play that determine the return for each of the different managers and the funds they run. However, we can say that the investing environment was more in the realms of what a New Zealand active equity manager would normally expect to see namely a more moderate return of 8.3% where once again a large factor in the return of the market was generated from dividends. It was also a year where investors had to navigate significant volatility for the first time in a good while and volatility creates opportunity for active managers.
Furthermore, the decision by the AMP to change to a passive approach means that around $9 billion dollars will no longer be actively trying to generate excess returns. That should leave those left trying to add alpha for their clients with some extra opportunities.
Because the more money that is passively invested the less price discovery is occurring; passive investors do not care about the price they pay for a company, they only care about its index weight. Which, all else being equal, should throw up more opportunities for the active New Zealand equity investor.
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Stephen has over 25 yrs investment experience & co-founded Castle Point, a NZ boutique fund manager, in 2013. Prior to that he worked at funds management companies in Auckland, London & Edinburgh. Castle Point WINNER FundSource Boutique Manager 2019