The philosophy at Kapital Advice is to select a stable of good investment managers that can provide our clients with access to a portfolio which can be tailored to their needs and managed on their behalf by specialists with the resources to grow their portfolio. In essence utilising managed funds.
We have licences with three specialist managed funds who utilise financial advisors to provide wealth management advice. we believe these investment managers provide a mix of management styles, expertise and schemes to provide a unique offering that we can tailor to meet the needs of our clients.
The role of Financial Advisors
The role of a financial advisor is to help ensure that their clients’ financial strategy is consistent with their risk tolerance, timeframes and goals, to help manage financial risk and support them in building wealth over the long term. The advisor needs to ensure that the investor’s wealth management strategy stays up to date with their stage of life and timeframe, that they understand what they own in their portfolio and how it is performing, and that they have an objective expert by their side.
The difference between working with a Financial Advisor and a product provider is that a Financial Advisor is there to provide a service and advice to help their client plan throughout their financial journey and select appropriate products; in contrast many KiwiSaver product providers are simply that – providers of products. Their personnel will change, and you are unlikely to get the continuity of advice and service that you will get through a good advisory firm.
Managed Funds
Managed funds satisfy the core tenet of investing, providing diversification within asset classes, across asset classes, across geographies and across markets, while providing the option of more sophisticated investment strategies that would otherwise be unavailable to most investors. Their diversity means that they can be tailored to virtually every investor timeframe, risk appetite and preference.
A big advantage for small investors is that managed funds are regulated investments, licenced under the Financial Markets Conduct Act. This means that the Financial Markets Authority licenses the fund manager and their supervisor and monitor whether they are meeting the standards required by law.
Different funds have different mixes of growth and income assets, as set out in the product disclosure statement. There is a trade-off between growth and risk. Growth assets like property and shares are more volatile, going up and down in value more frequently that income assets such as cash and bonds. As result, growth assets need a longer time-horizon to manage their more volatile risk profile.
Portfolios can be managed using passive or active investment management strategies.
KiwiSaver
KiwiSaver is a type of Managed Fund with a number of additional benefits designed to attract Kiwis to save for their retirement. The legislation includes a set of rules unique to KiwiSaver that are designed to ensure savings are held through to retirement, with some exceptions around first home purchase and financial hardship.
Passive Funds
Passive managers focus on mirroring or “tracking” their chosen index, making decisions to buy or sell based on how the entire market looks at any one time. This approach is based on the premise that markets are ‘efficient’ and therefore the prices of commonly traded financial assets reflect all price sensitive information. Under a passive strategy, managers do not seek to outperform the market but simply aim to do as well as the market, although they will not quite match the market due to management fees.
Index funds and exchange traded funds are designed to duplicate as precisely as possible the performance of a selected market index. A purely passive strategy would use only index funds and would weight their investments within those funds by fixed proportions that do not vary in response to perceived market conditions.
The major advantages of passive funds are:
Active Funds
Active managers aim to outperform their chosen index, typically favouring certain assets or sectors over others, or buying assets that they deem undervalued. The more sophisticated active managers also employ tools to mitigate risk and leverage growth, such as derivatives, options, hedge funds and alternative assets.
If you are using managed fund to select and grow your investment, it makes sense to consider the suitability of the expert you have selected to manage those investments. This is particularly the case if you are seeking to leverage growth assets to grow your investment – and this is where the manager will earn their fees.
Our view is that low fees can be a consideration for defensive and conservative funds, which are less volatile by virtue of the nature of the assets involved. In essence, there is less expectation of your manager generating above market returns – particularly in an environment where interest rates are declining. Even so, there have been times of extreme volatility in bonds as occurred for a short period in March 2020, when markets took the lead from the US as investors sold assets indiscriminately to raise cash as the COVID outbreak escalated. This led to a sharp decline in the value of bonds and consequently associated portfolios, although this was a short event and the market quickly corrected. Prior to that, there was a bond market crash in 1994 in the wake of central banks on both sides of the Atlantic raising interest rates, startling bond investors who were criticised as being too complacent at the time. These should be reminders of the need to understand the markets you are invested in.
In recent years, conservative funds have benefitted from capital gains as a consequence of falling interest rates and a reversal in this trend should be monitored for its impact on future capital gains. This is where a managed fund can seek to actively manage the risk-return of your fixed-interest investments. For the present though, we remain in a low interest rate environment.
We view growth assets as suiting themselves to active management, employing specialists to manage your investments. This is akin to having a professional manage your assets for you, but utilising a team with the resources to analyse the performance of investments across asset classes, both domestically and internationally. This is particularly the case where the fund managers employ strategies to take advantage of specialist knowledge on growth sectors, undervalued assets and strategies to mitigate risk. An understanding of these benefits may also allow investors to invest in growth assets, with the benefit that a specialist team is actively managing their investments for them and the associated risk.
Fees
Actively managed funds can generally be expected to have higher fees than passive funds, precisely because of their approach to portfolio management, wealth management and financial advice.
However, their ‘Total Annual Fund Charges’ are transparent and published as part of their oversight through the Financial Markets Authority. To aid transparency on their relative performance, their returns are published after fees have been deducted, providing visibility on the return to the investor.
This stands in contrast to broker-built investment portfolios, which can be difficult to calculate and can include costs such as portfolio management fees, advisory and custody fees, brokerage fees, cash management fees, foreign currency fees and margins and underlying fees on managed funds. Taken together, these fees can be 5% to 6% of the funds under management, or higher, although the gap in their disclosure requirements makes estimates - and therefore comparisons with managed funds - difficult. So while clients of brokerage firms may feel they get a more personalised and tailored service, this can come at a higher price, which is also not particularly transparent.
At Kapital Advice, we believe that the benefits of a personalised offering can be achieved through ongoing advice from a financial advisor and their relationship with an actively managed fund or funds that utilise financial advisors as part of their service offering. Rather than offering KiwiSaver and Manged Funds as a product, actively managed funds provide a cost-effective framework for Financial Advisors to provide ongoing financial advice, wealth management and investment planning services.
We principally utilise three active fund managers, all three are New Zealand owned companies – NZ Funds Management Limited, Booster and Generate. However, advice is not limited to these funds, particularly where we feel an alternative approach is appropriate.
NZ Funds
NZ Funds was formed in 1988, growing to be one of New Zealand’s largest privately owned wealth management firms, wholly owned by past and present employees.
The CEO, Michael Lang, BA (Econ), LLB (Hons) is a Chartered Financial Analyst (CFA) who took the helm in 2018, following nine years as Chief Investment Officer (CIO). The present CIO, James Grigor, is also as Chartered Financial Analyst. James took over as CIO following senior portfolio and advisory positions at NZ Funds, Macquarie Group, Ernst and Young and the NZ Army.
NZ Funds is probably New Zealand’s most active fund manager, as borne out by research released by the Financial Markets Authority in August 2020. Their investment approach is tailored around risk mitigation, utilising portfolios which are constructed using a set of building blocks, each designed to capture the return of an asset class but also seeking to outperform when markets endure protracted decline. The core asset classes are then complemented with additional strategies to ensure that each underlying portfolio is more robust in a downturn that the core asset class it tracks. This includes the ability to manage downside risk through either active management or through the use of investment managers and asset classes capable of profiting during financial market downturns.
NZ Funds employ a global network of investment managers to add value to their clients’ portfolios. NZ Funds has a due diligence process for appointing specialist managers and all managers are monitored and reviewed. As at November 2020 these included Emerson Point (global shares), Fisher Investments (global shares), Galaxy (institutional bitcoin fund), MFS (global shares), Survetta Capital (global shares), Universa (alternative securities).
NZ Funds has adopted a Responsible Investment Policy to ensure clients’ funds are invested in a socially responsible manner and is a signatory to the United Nations Principles for Responsible Investment (UNPRI). The company also contracts an independent specialist company to provide socially responsible investment research that identifies ‘red flag’ companies.
Booster
Booster is an independent wealth management company based in Wellington offering a suite of socially responsible investment funds, starting as Grosvenor Financial Services Group in 1998.
Their CEO, Allan Yeo gained a first-class honours degree in economics from Victoria University. He formed Booster Financial Services in 1998, to provide New Zealanders with a financial services company that was locally owned and true to Kiwi values. In founding Booster Financial Services, Allan brought with him over 20 years’ experience in management, trading and investment with Barclays, Westpac and briefly the NZ government.
Booster have a very experienced leadership and management team, including Executive Chairman, Paul Foley, who is now a consultant with MinterEllisonRuddWatts, having been a partner there for more than 28 years. He has over 30 years’ experience working with companies in the financial services, manufacturing and energy fields. He is a past director and chair of NZX and ASX listed companies and a Chartered Fellow of the NZ Institute of Directors
The investment team consider environmental, social and governance risks when assessing investments across all of their core KiwiSaver and Investment funds, including certification with the Responsible Investment Association Australasian (RIAA). Their offering includes some of the most socially responsible KiwiSafer funds as recognised by Mindful Money, as well as a unique proposition supporting New Zealand companies and innovation partnerships through specialist investment funds – the Tahi fund and NZ Innovation Booster.
Booster’s is one of nine default KiwiSaver providers and was the first KiwiSaver scheme provider to offer certified socially responsible schemes..
Generate
Generate is a New Zealand owned specialist Kiwiaver provider, which has achieved good success and returns since starting in 2013, including Good Returns Fund Manager of the Year 2019 and Morningstar Awards 2020 nominee.
The CEO and co-founder, Henry Tongue, has over 20 years’ experience in financial markets, including various roles in New Zealand and London as an equity analyst and portfolio manager for companies including Credit Suisse, Abbey National and Huljich Wealth Management (prior to its sale to Fisher Funds Management Limited in 2011).
Investment Committee members include Peter Brook, Sam Goldwater and Nick Bowden. Peter is a member of the Institute of Finance Professionals New Zealand with over 20 years of commercial and investment banking experience. He has a number of consultancy and business interests including as chairman/director/trustee of several companies and charitable organisation. Sam has 20 years of financial markets experience in fixed income sales and trading, bond desk management and portfolio management; while Nick has over 20 years’ experience working with various financial investment firms in New York and London.
Generate is also an active fund manager, investing in leading companies in New Zealand and overseas. The investment managers also utilise underlying funds that invest predominately in equities and direct investment in international stocks. These funds are selected due to their size, scale, resourcing and expertise - which is generally not available in New Zealand. They include Berkshire Hathaway, Platinum Asset Management, T.Rowe Price and Magellan Asset Management. Generate also use investment strategies such as hedging and options, as well as short-selling through some of these international managers.
Funds are invested in a way that incorporates environmental, social and governance (ESG) issues, manages risk and generates sustainable long-term returns. Generate believes that proactively managing ESG issues will deliver stronger long-term investment returns and in line with these principles is a signatory to the United Nations Principles for Responsible Investment (UNPRI).
We have licences with three specialist managed funds who utilise financial advisors to provide wealth management advice. we believe these investment managers provide a mix of management styles, expertise and schemes to provide a unique offering that we can tailor to meet the needs of our clients.
The role of Financial Advisors
The role of a financial advisor is to help ensure that their clients’ financial strategy is consistent with their risk tolerance, timeframes and goals, to help manage financial risk and support them in building wealth over the long term. The advisor needs to ensure that the investor’s wealth management strategy stays up to date with their stage of life and timeframe, that they understand what they own in their portfolio and how it is performing, and that they have an objective expert by their side.
The difference between working with a Financial Advisor and a product provider is that a Financial Advisor is there to provide a service and advice to help their client plan throughout their financial journey and select appropriate products; in contrast many KiwiSaver product providers are simply that – providers of products. Their personnel will change, and you are unlikely to get the continuity of advice and service that you will get through a good advisory firm.
Managed Funds
Managed funds satisfy the core tenet of investing, providing diversification within asset classes, across asset classes, across geographies and across markets, while providing the option of more sophisticated investment strategies that would otherwise be unavailable to most investors. Their diversity means that they can be tailored to virtually every investor timeframe, risk appetite and preference.
A big advantage for small investors is that managed funds are regulated investments, licenced under the Financial Markets Conduct Act. This means that the Financial Markets Authority licenses the fund manager and their supervisor and monitor whether they are meeting the standards required by law.
Different funds have different mixes of growth and income assets, as set out in the product disclosure statement. There is a trade-off between growth and risk. Growth assets like property and shares are more volatile, going up and down in value more frequently that income assets such as cash and bonds. As result, growth assets need a longer time-horizon to manage their more volatile risk profile.
Portfolios can be managed using passive or active investment management strategies.
KiwiSaver
KiwiSaver is a type of Managed Fund with a number of additional benefits designed to attract Kiwis to save for their retirement. The legislation includes a set of rules unique to KiwiSaver that are designed to ensure savings are held through to retirement, with some exceptions around first home purchase and financial hardship.
Passive Funds
Passive managers focus on mirroring or “tracking” their chosen index, making decisions to buy or sell based on how the entire market looks at any one time. This approach is based on the premise that markets are ‘efficient’ and therefore the prices of commonly traded financial assets reflect all price sensitive information. Under a passive strategy, managers do not seek to outperform the market but simply aim to do as well as the market, although they will not quite match the market due to management fees.
Index funds and exchange traded funds are designed to duplicate as precisely as possible the performance of a selected market index. A purely passive strategy would use only index funds and would weight their investments within those funds by fixed proportions that do not vary in response to perceived market conditions.
The major advantages of passive funds are:
- They fulfil the basic tenet of investing, providing a diversified pool of assets that can be matched to the investors age-profile, risk appetite and preferences
- There are a wide range of passive funds available (as well as index funds and exchange traded funds), allowing investors to choose which sectors they are exposed to
- Their light management approach means that management fees are lower.
Active Funds
Active managers aim to outperform their chosen index, typically favouring certain assets or sectors over others, or buying assets that they deem undervalued. The more sophisticated active managers also employ tools to mitigate risk and leverage growth, such as derivatives, options, hedge funds and alternative assets.
If you are using managed fund to select and grow your investment, it makes sense to consider the suitability of the expert you have selected to manage those investments. This is particularly the case if you are seeking to leverage growth assets to grow your investment – and this is where the manager will earn their fees.
Our view is that low fees can be a consideration for defensive and conservative funds, which are less volatile by virtue of the nature of the assets involved. In essence, there is less expectation of your manager generating above market returns – particularly in an environment where interest rates are declining. Even so, there have been times of extreme volatility in bonds as occurred for a short period in March 2020, when markets took the lead from the US as investors sold assets indiscriminately to raise cash as the COVID outbreak escalated. This led to a sharp decline in the value of bonds and consequently associated portfolios, although this was a short event and the market quickly corrected. Prior to that, there was a bond market crash in 1994 in the wake of central banks on both sides of the Atlantic raising interest rates, startling bond investors who were criticised as being too complacent at the time. These should be reminders of the need to understand the markets you are invested in.
In recent years, conservative funds have benefitted from capital gains as a consequence of falling interest rates and a reversal in this trend should be monitored for its impact on future capital gains. This is where a managed fund can seek to actively manage the risk-return of your fixed-interest investments. For the present though, we remain in a low interest rate environment.
We view growth assets as suiting themselves to active management, employing specialists to manage your investments. This is akin to having a professional manage your assets for you, but utilising a team with the resources to analyse the performance of investments across asset classes, both domestically and internationally. This is particularly the case where the fund managers employ strategies to take advantage of specialist knowledge on growth sectors, undervalued assets and strategies to mitigate risk. An understanding of these benefits may also allow investors to invest in growth assets, with the benefit that a specialist team is actively managing their investments for them and the associated risk.
Fees
Actively managed funds can generally be expected to have higher fees than passive funds, precisely because of their approach to portfolio management, wealth management and financial advice.
However, their ‘Total Annual Fund Charges’ are transparent and published as part of their oversight through the Financial Markets Authority. To aid transparency on their relative performance, their returns are published after fees have been deducted, providing visibility on the return to the investor.
This stands in contrast to broker-built investment portfolios, which can be difficult to calculate and can include costs such as portfolio management fees, advisory and custody fees, brokerage fees, cash management fees, foreign currency fees and margins and underlying fees on managed funds. Taken together, these fees can be 5% to 6% of the funds under management, or higher, although the gap in their disclosure requirements makes estimates - and therefore comparisons with managed funds - difficult. So while clients of brokerage firms may feel they get a more personalised and tailored service, this can come at a higher price, which is also not particularly transparent.
At Kapital Advice, we believe that the benefits of a personalised offering can be achieved through ongoing advice from a financial advisor and their relationship with an actively managed fund or funds that utilise financial advisors as part of their service offering. Rather than offering KiwiSaver and Manged Funds as a product, actively managed funds provide a cost-effective framework for Financial Advisors to provide ongoing financial advice, wealth management and investment planning services.
We principally utilise three active fund managers, all three are New Zealand owned companies – NZ Funds Management Limited, Booster and Generate. However, advice is not limited to these funds, particularly where we feel an alternative approach is appropriate.
NZ Funds
NZ Funds was formed in 1988, growing to be one of New Zealand’s largest privately owned wealth management firms, wholly owned by past and present employees.
The CEO, Michael Lang, BA (Econ), LLB (Hons) is a Chartered Financial Analyst (CFA) who took the helm in 2018, following nine years as Chief Investment Officer (CIO). The present CIO, James Grigor, is also as Chartered Financial Analyst. James took over as CIO following senior portfolio and advisory positions at NZ Funds, Macquarie Group, Ernst and Young and the NZ Army.
NZ Funds is probably New Zealand’s most active fund manager, as borne out by research released by the Financial Markets Authority in August 2020. Their investment approach is tailored around risk mitigation, utilising portfolios which are constructed using a set of building blocks, each designed to capture the return of an asset class but also seeking to outperform when markets endure protracted decline. The core asset classes are then complemented with additional strategies to ensure that each underlying portfolio is more robust in a downturn that the core asset class it tracks. This includes the ability to manage downside risk through either active management or through the use of investment managers and asset classes capable of profiting during financial market downturns.
NZ Funds employ a global network of investment managers to add value to their clients’ portfolios. NZ Funds has a due diligence process for appointing specialist managers and all managers are monitored and reviewed. As at November 2020 these included Emerson Point (global shares), Fisher Investments (global shares), Galaxy (institutional bitcoin fund), MFS (global shares), Survetta Capital (global shares), Universa (alternative securities).
NZ Funds has adopted a Responsible Investment Policy to ensure clients’ funds are invested in a socially responsible manner and is a signatory to the United Nations Principles for Responsible Investment (UNPRI). The company also contracts an independent specialist company to provide socially responsible investment research that identifies ‘red flag’ companies.
Booster
Booster is an independent wealth management company based in Wellington offering a suite of socially responsible investment funds, starting as Grosvenor Financial Services Group in 1998.
Their CEO, Allan Yeo gained a first-class honours degree in economics from Victoria University. He formed Booster Financial Services in 1998, to provide New Zealanders with a financial services company that was locally owned and true to Kiwi values. In founding Booster Financial Services, Allan brought with him over 20 years’ experience in management, trading and investment with Barclays, Westpac and briefly the NZ government.
Booster have a very experienced leadership and management team, including Executive Chairman, Paul Foley, who is now a consultant with MinterEllisonRuddWatts, having been a partner there for more than 28 years. He has over 30 years’ experience working with companies in the financial services, manufacturing and energy fields. He is a past director and chair of NZX and ASX listed companies and a Chartered Fellow of the NZ Institute of Directors
The investment team consider environmental, social and governance risks when assessing investments across all of their core KiwiSaver and Investment funds, including certification with the Responsible Investment Association Australasian (RIAA). Their offering includes some of the most socially responsible KiwiSafer funds as recognised by Mindful Money, as well as a unique proposition supporting New Zealand companies and innovation partnerships through specialist investment funds – the Tahi fund and NZ Innovation Booster.
Booster’s is one of nine default KiwiSaver providers and was the first KiwiSaver scheme provider to offer certified socially responsible schemes..
Generate
Generate is a New Zealand owned specialist Kiwiaver provider, which has achieved good success and returns since starting in 2013, including Good Returns Fund Manager of the Year 2019 and Morningstar Awards 2020 nominee.
The CEO and co-founder, Henry Tongue, has over 20 years’ experience in financial markets, including various roles in New Zealand and London as an equity analyst and portfolio manager for companies including Credit Suisse, Abbey National and Huljich Wealth Management (prior to its sale to Fisher Funds Management Limited in 2011).
Investment Committee members include Peter Brook, Sam Goldwater and Nick Bowden. Peter is a member of the Institute of Finance Professionals New Zealand with over 20 years of commercial and investment banking experience. He has a number of consultancy and business interests including as chairman/director/trustee of several companies and charitable organisation. Sam has 20 years of financial markets experience in fixed income sales and trading, bond desk management and portfolio management; while Nick has over 20 years’ experience working with various financial investment firms in New York and London.
Generate is also an active fund manager, investing in leading companies in New Zealand and overseas. The investment managers also utilise underlying funds that invest predominately in equities and direct investment in international stocks. These funds are selected due to their size, scale, resourcing and expertise - which is generally not available in New Zealand. They include Berkshire Hathaway, Platinum Asset Management, T.Rowe Price and Magellan Asset Management. Generate also use investment strategies such as hedging and options, as well as short-selling through some of these international managers.
Funds are invested in a way that incorporates environmental, social and governance (ESG) issues, manages risk and generates sustainable long-term returns. Generate believes that proactively managing ESG issues will deliver stronger long-term investment returns and in line with these principles is a signatory to the United Nations Principles for Responsible Investment (UNPRI).