Growing alternatives in KiwiSaver: what needs to be in place

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This is the third post in a short series on private markets in KiwiSaver. The first covered the FMA’s report on private assets in managed funds and what it tells us about where providers and the regulator are heading. The second looked behind the headline KiwiSaver funds under management numbers to see where member money is actually flowing.

I also cover the FMA’s 2026 KiwiSaver Annual Report.

This post deals with the practical question that follows: if allocations to alternatives within KiwiSaver are going to grow, what needs to be in place for that to happen well? Valuation, governance, diversification and liquidity management all have a part to play.  However, side pockets, an idea that has attracted a good deal of attention, are not a necessary condition for that growth.

What is a side pocket?

A side pocket separates an illiquid or hard-to-value asset from the rest of a fund.

There are really two different uses of the term, and it matters which one is being discussed:

  • an event-driven side pocket, used when an asset that was expected to be liquid suddenly becomes untradeable, such as Russian securities after sanctions followed Russia’s invasion of Ukraine in 2022.
  • a structural sleeve, where a fund deliberately holds private assets and needs a standing mechanism for members who want to leave before those assets can be sold.

This post focuses on the second use, the structural sleeve.

Take a KiwiSaver fund with 95 percent in listed shares, bonds and cash and 5 percent in an unlisted private asset. A member wants to transfer out.

With a side pocket, the member receives their share of the 95 percent now and keeps an entitlement to the 5 percent unlisted asset. The manager sells the unlisted asset in due course and pays the proceeds to the pocket holders. The main fund never has to find that cash.

Without a side pocket, the member receives 100 percent in cash, which the manager raises either by selling the unlisted asset or by selling liquid assets. Selling the liquid assets risks leaving remaining members with a larger share of the illiquid asset.

The key issue is the ability of the manager to manage the fund’s redemption requests.

What a side pocket changes are the pressures on the manager to turn that asset into cash, and how easily the manager can handle member cash flows in the other 95 percent.

The argument for side pockets is that without one there is the risk that a wave of redemptions forces either a distressed sale of the unlisted asset or the sale of liquid assets, leaving remaining members holding a larger share of the illiquid asset.

The case usually made for side pockets in KiwiSaver rests on portability. Members can move to another provider, generally within ten working days, so a fund holding illiquid assets may need to find cash quickly. I do not think that is a binding constraint. Liquidity management, diversification, and a sound valuation policy are what matter.

Providers in more mature markets manage unlisted allocations alongside member switching by sizing those allocations, pacing commitments and holding liquid assets against expected flows. KiwiSaver providers can do the same.

The case for, and against

In favour of side pockets: they give a manager time to sell an illiquid asset properly rather than being forced into a distressed sale to fund an exit, and they stop remaining members ending up holding a larger share of the illiquid asset than before, simply because liquid assets were the only thing available to sell quickly.

Against them: they do not create liquidity; they separate the illiquid asset from the rest of the fund. The illiquid asset still has to be valued, monitored and eventually sold. Operationally, they add cost and complexity, with separate units, separate reporting and difficult questions around transfers and hardship withdrawals. Most importantly, they do not address the reason the illiquidity became a problem in the first place.

What international experience shows

Side pockets are used structurally in hedge funds and other open-ended alternative funds, where professional investors accept lock-ups and agree the terms up front.

I am not aware of them being used as a standing sleeve within mainstream retirement funds. In regulated funds in the UK, EU and India, their recognised use has been exceptional and reactive, after assets became untradeable, distressed or unreliable to value. The UK Financial Conduct Authority’s regime, for example, exists because sanctions made certain Russian-linked assets untradeable. Meanwhile, retirement funds overseas, Australian superannuation funds among them, have built sizeable unlisted allocations, as far as I am aware, without relying on side pockets.

The idea that KiwiSaver needs side pockets to increase private asset investment is not evident in international experience.

A split industry

MBIE’s December 2024 discussion document proposed amending the KiwiSaver Act to let providers use tools such as side pockets while still meeting portability requirements. Submissions were far from united.

Some submitters opposed side pockets. One warned that their availability could encourage less disciplined management of problem assets, and another argued that individual assets are better managed within a fund’s wider liquidity. Others supported them, preferring side pockets to the alternative of suspending redemptions (an extreme outcome). A few were cautious or raised other concerns.

What the FMA is actually focused on

The FMA’s attention is on something else. Its April 2026 report on private assets in managed funds, covered earlier in this series, flagged valuation practices, review frequency, governance, conflicts of interest and investor communication as the areas requiring attention as allocations grow.

The FMA’s April 2024 liquidity risk management guide lists side pockets among available tools and says managers should not rely solely on such tools.

Is KiwiSaver genuinely constrained without side pockets?

KiwiSaver contributions are regular, and for most providers they exceed the amounts leaving the fund in a typical year. Scheme transfers, although large, are set against a backdrop of net contributions. See my earlier post, Beyond the headlines.

Most members cannot access their savings on demand: access is generally limited to permitted categories such as retirement, first-home purchase, significant financial hardship and serious illness.

The exception is the right to transfer to another provider. The portability rule is the basis of the argument for side pockets.

The FMA’s survey found most KiwiSaver providers plan to increase their private asset allocations over the next three years. The intention is there. The question is what needs to be in place.

Could side pockets limit allocations to alternatives?

A side pocket also creates a practical problem.

A manager running a diversified unlisted allocation across private equity, infrastructure, private debt and property holds many assets with different valuation dates, capital calls and distribution patterns.

Ring-fencing them in side pockets means separate units, records and valuations, and it disrupts the commitment pacing the manager relies on. Capital calls on a pocketed commitment still have to be met, and distributions no longer flow back into the main fund to finance new commitments.

With a standing side pocket, every departing member would also wait for part of their balance in normal conditions, not just in a crisis.

That leads to an irony. A mechanism proposed to encourage private assets could end up limiting them. Members can switch providers, and a provider that pays out in full and promptly is more attractive than one that holds part of the balance back.

Used routinely, a side pocket could cap allocations to alternatives, not grow them.

Single-strategy fund versus multi-asset fund

A distinction is worth making here. The case for side pockets rests on the image of a wave of redemptions creating the pressure. That image is far more plausible in a concentrated, single-strategy vehicle (a dedicated property or mortgage fund) than in a diversified KiwiSaver fund, where the illiquid sleeve is typically a modest part of a much broader portfolio.

In a single-strategy fund, the illiquid holding is essentially the whole redemption risk. In a diversified fund, members redeeming or switching en masse are usually responding to something else entirely: poor relative performance, high fees, or a governance or reputational problem.

None of this means KiwiSaver carries no liquidity risk. A fund can still be tested for reasons that have nothing to do with its illiquid holdings.

A well-run provider still has to size unlisted allocations using cash-flow forecasting, allocation limits and commitment pacing, so that it can be sustained without assuming every holding is redeemable at short notice.

That points to a fair question: if an unlisted allocation is only workable because a departing member might be left holding an illiquid residual interest, was the allocation appropriately sized for that fund in the first place?

The role of diversification

The first fundamental is diversification within the unlisted allocation itself.

Concentration risk sits quietly inside a lot of unlisted asset conversations. A fund that spreads a modest unlisted allocation across several asset types, such as infrastructure, private debt, private equity and property, and across a reasonable number of individual holdings within each, is far better placed to absorb a single asset or sector-wide shock than one that builds a large position in one manager, one asset type, or one specific project.

An asset-class failure, or the failure of one large individual holding, can move fund values in a way that a side pocket does nothing to prevent.

Diversification does not eliminate illiquidity, but it reduces the odds that illiquidity and a material loss of value arrive in the same asset at the same time, which is when the fairness between members is most at risk.

Advanced liquidity management

Diversification needs to be paired with proper liquidity management, and that means modelling, not guessing.

The established institutional practice, used by large pension plans and endowments, is a liquidity budget: projecting expected fund flows (contributions, withdrawals, and, in KiwiSaver’s case, transfers between providers), against modelled market returns, and stress testing that projection rather than relying on the central case alone.

Stochastic modelling, running the fund through thousands of simulated paths for both cash flows and returns, is the usual tool among large institutions. It can also be used to plan private equity commitment schedules against expected capital calls and distributions.

That modelling should then set the fund’s liquidity tiers: how much sits in daily-traded listed assets, how much in monthly or quarterly redemption vehicles, and how much can genuinely be committed to multi-year private equity or infrastructure lock-ups without compromising the fund’s ability to meet ordinary redemptions and transfers.

Layering liquidity terms this way, sometimes called a liquidity ladder, does a different job to asset diversification. Diversification reduces the odds of a single asset or sector dragging down the portfolio. Liquidity tiering reduces the risk that a fund is forced to sell the wrong asset at the wrong time purely because it has to.

Ultimately, this is the analysis that should determine a fund’s appropriate allocation to alternatives and private markets in the first place, not a target set in isolation and defended after the fact.

It is worth asking whether that rigour would actually get built if the default position were simply to rely on a side pocket. A standing side pocket gives a fund somewhere to put a mistake. A liquidity budget and a properly stress-tested modelling process force the mistake to be avoided before it happens.

A KiwiSaver fund could still face a mismatch between its unlisted allocation and its transfer obligations, particularly if the allocation was poorly sized. That is an argument for getting the sizing, diversification, valuation and liquidity management right, not for a side pocket.

A robust valuation policy

In addition to diversification and a liquidity management framework, a robust valuation policy is essential.

Valuation is where the FMA has been most specific. Its April 2026 report found most providers follow international standards, use independent valuers and have strong governance frameworks.

It also found a lack of formal provision for out-of-cycle valuations, and that some providers have limited insight into the inputs used by external valuers.

The FMA does not prescribe a valuation framework, but a sound policy would likely include:

  • an independent valuation of each unlisted holding at least annually
  • formal quarterly valuations
  • monthly desktop reviews between those dates, updating for cash flows, market movements and known events
  • defined triggers for an out-of-cycle valuation, such as a sharp move in listed comparables, a significant event at the asset or the sale of a similar asset, with a set process and timeframe for revaluing and, where needed, adjusting the unit price
  • a valuation committee independent of the portfolio managers, with extra scrutiny of related-party assets
  • access to the valuer’s inputs and methodology, not just the number
  • back-testing of marks against actual sale prices, and a clear policy for correcting unit pricing errors
  • plain disclosure to members of how, and how often, unlisted assets are valued

Valuation cannot make an asset liquid. It can make sure members transact at a fair price whenever they move. A side pocket does nothing to fix a weak valuation process. It only changes where the weakness shows up.

Governance

Governance ties this together. An independent investment committee should approve the limits on unlisted allocations, the liquidity policy and the valuation policy. The supervisor should be satisfied the framework works in practice, and conflicts, particularly related-party holdings, should be managed in the open. The FMA has flagged conflicts and oversight as areas needing attention.

Which side of the pocket am I on?

Side pockets are neither necessary nor sufficient for growing alternatives within KiwiSaver, and that growth should not rely on them.

In regulated funds, side pockets have mostly been associated with distressed or impaired assets. The UK’s Financial Conduct Authority regime, for example, exists because sanctions made certain Russian-linked assets untradeable, not because UK retail funds decided in advance to hold structurally illiquid assets.

Making a side pocket a standard feature of KiwiSaver would normalise a tool designed for exceptional circumstances and risk it being treated as a substitute for getting the fundamentals right.

Those fundamentals are the same ones the FMA is already focused on: sound investment decisions, appropriate liquidity management, robust and independent valuation policies, and good governance. Get that right, along with appropriate diversification, and a side pocket becomes something a fund rarely if ever needs. Get them wrong, and a side pocket does not fix the underlying problem, it simply determines who is left holding it.

Conclusion

Portability is routinely treated as the binding constraint that makes side pocketing necessary. However, a scheme that sizes its private allocation to its own contribution and transfer patterns will unlikely be tested it in practice.

Side pockets, an exceptional tool in regulated funds overseas, should not become the default answer. A standing side pocket makes it too easy to skip the rigorous liquidity modelling that should be setting the allocation in the first place, which is reason enough on its own to keep it as a last resort rather than a starting assumption.

Ironically, the tool promoted to unlock alternatives could end up limiting them. The added complexity works against the goal of encouraging private asset investments.

The industry’s energy is better spent on the fundamentals: sound investment decisions, disciplined liquidity modelling, valuation policies, governance, and genuine diversification across unlisted asset types and individual holdings, so that concentration risk in any one asset or asset class does not become a fund-wide problem.

Get that right, and most of the argument for side pockets falls away on its own.

Remember, diversify your diversifiers.

Happy investing.

Disclosure

Please read the Kiwi Investor Blog Disclosure Statement before relying on any information in this post. This blog is written for information and discussion purposes only. Nothing in this post constitutes financial advice. All investment strategies involve risk, including the loss of principal. Readers should seek independent financial advice before making any investment decisions. The views expressed in this post are my own and do not represent the views of my employer or any organisation with which I am affiliated.

Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.

The FMA’s 2026 KiwiSaver Annual Report: private assets and liquidity in focus

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The FMA published its KiwiSaver Annual Report for the year to 31 March 2026 last month, and it is worth reading in its own right.

In her foreword, the FMA’s Head of Investment Management points to two developments singled out over the year, a growing presence of private assets in KiwiSaver portfolios and managers lifting their liquidity risk management practices following the FMA’s 2024 guidance.

Those two threads happen to follow on directly from previous KiwiInvestor Blog posts. They pick up the funds flow and accumulation story from my last post, Beyond the transfer headlines, and they update the review I did in April on how private assets are being valued and governed across New Zealand’s managed funds. See links below.

A quick recap of the Annual Report first, before getting into the private assets and liquidity detail.

The year in brief

  • Total KiwiSaver funds under management reached $138.8 billion as at 31 March 2026, up 12.8 per cent for the year. Graph from the FMA.
  • Membership reached 3.44 million, up 1.6 per cent. The average balance crossed $40,000 for the first time, up 11 per cent, mostly on the back of a strong year for investment returns.
  • Contributions hit a record $13.2 billion, up 8.2 per cent. Member contributions did most of the work, up 11.1 per cent to $8.7 billion and now close to two thirds of the total.
  • Withdrawals reached a record $6.8 billion, up 15.7 per cent. First home withdrawals alone totalled $2.2 billion across more than 50,000 members. Graph from the FMA.
  • Total fees reached $978 million, up 12.6 per cent, broadly tracking the growth in funds under management, so the fee to FUM ratio held steady at around 0.7 per cent.

None of that changes the accumulation phase story from my last post. It just fills in the picture a little.

Now to two areas of focus in this year’s FMA report

Private assets in KiwiSaver

The FMA surveyed Managed Investment Scheme managers again this year to understand their exposure to private assets and how they are valuing them. Among managers that reported holding private assets at all, allocations within retail funds averaged less than 5 per cent of assets under management.

On where the exposure actually sits, direct investment is concentrated in real estate equity, private debt, private equity and real estate debt.

Indirect investment, which managers reported as the more common route in, leans toward private equity, private debt and infrastructure equity, with growing interest in venture capital.

Governance around this exposure looks reasonably mature. Most managers reported using internationally recognised valuation standards, independent valuers for directly held assets, multiple valuation methodologies to cross check results, and a clear separation between who prepares a valuation and who approves it.

The FMA’s own areas for continued attention are valuation frequency, the processes around out of cycle valuations when markets move suddenly, and limited visibility some managers have over the assumptions underlying indirectly held asset valuations.

Liquidity risk management, a genuine uplift

The FMA published its liquidity risk management guide in April 2024, and this year’s report is the first real progress check against it. The finding is a positive one.

Supervisory engagement shows a clear uplift in practice across the sector since the 2024 guide was published. Board approved frameworks are now the norm rather than the exception, and liquidity risk management is becoming more integrated into broader risk and compliance processes rather than sitting off to the side.

The FMA is careful to frame what remains as refinement rather than a structural gap, better defined escalation triggers, more developed stress testing, and clearer sequencing for how liquidity tools would actually be deployed if needed.

Stress testing in particular is flagged as one of the harder areas to get right, given the data limitations and judgement calls involved in designing meaningful scenarios.

Modelling forward, not just testing backward

This is the part I think deserves more attention.

The FMA’s guide requires stress testing against large withdrawals and extreme but plausible market conditions, both backward looking historical scenarios and forward looking hypothetical ones. What it does not explicitly require is forward modelling of a scheme’s own net fund flows, growth as well as decline, under a range of future scenarios.

That gap matters more as private market allocations increase. A private market allocation is typically set and monitored as a percentage of total funds under management. If net contributions slow, plateau or reverse for a period, while the underlying private commitments stay largely fixed in dollar terms and illiquid, that percentage can drift upward without a manager doing anything at all. KiwiSaver’s current accumulation phase makes this feel like a remote risk. It should not be assumed to hold indefinitely, and a scheme built around the assumption that inflows will always be there is not well governed.

In my view, none of this requires new regulation to justify it. It sits comfortably within the governance, liquidity management and valuation focus the FMA already has, in its 2024 guide and again in this year’s Annual Report. Large KiwiSaver managers increasing their private market allocations would do well to have this modelling in place well ahead of any FMA expectation that they do so.

Why this matters

New Zealand still lags Australia meaningfully on private market allocation within retirement savings, a gap I have written about before on this blog. Closing that gap sensibly requires the governance behind it to keep pace with the allocations themselves. On the evidence in this report, valuation practice and liquidity risk management are both moving in the right direction.

The FMA puts its own expectation simply. Providers, it says, should ensure their “valuation, liquidity, governance and disclosure arrangements remain appropriate” as private asset exposure continues to grow. That is a fair summary of everything covered above, and a reasonable bar for any manager to hold itself to.

This is the second post in a short series working through KiwiSaver’s 2026 numbers in some depth. The next will turn to a more specific question sitting behind much of this discussion, whether side pockets have a place in KiwiSaver as private asset allocations grow. Worth checking back for.

Further reading

For the original review of the FMA’s private assets survey, see FMA report on private assets in New Zealand managed funds.

For the funds flow and market share context behind this post, see Beyond the transfer headlines.

Source: FMA KiwiSaver Annual Report 2026.

Happy investing.

Disclosure

Please read the Kiwi Investor Blog Disclosure Statement before relying on any information in this post. This blog is written for information and discussion purposes only. Nothing in this post constitutes financial advice. All investment strategies involve risk, including the loss of principal. Readers should seek independent financial advice before making any investment decisions. The views expressed in this post are my own and do not represent the views of my employer or any organisation with which I am affiliated.

Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.

Beyond the transfer headlines: why KiwiSaver’s accumulation story matters more than the league table

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The FMA’s 2026 Annual Report and the newly released KiwiSaver XIX report from Investment News NZ both pointed to a sharp rise in scheme transfers, and the coverage since has focused almost entirely on who is winning and who is losing that competition.

This post focusses on the KiwiSaver XIX report, a post on the FMA’s 2026 Annual Report will follow.

Milford took $2.0 billion in net transfers this year, a record. ANZ lost $974 million and close to 20,000 members from its competitors.

The big five providers (ANZ, ASB, Fisher, Milford, Westpac) collectively lost market share again, their combined slice of total funds under management slipping from 64.4 per cent to 62.8 per cent.

That story is true, and worth understanding.

It is not, however, the whole picture. The part that tends to get left out matters more for how a KiwiSaver provider actually manages money, and it is worth exploring.

The system is still in accumulation

Zoom out from the competitive scoreboard and the more important number is this: total KiwiSaver funds under management reached $138.8 billion as at 31 March 2026, up 12.8 per cent for the year.

That growth was driven by contributions of $13.2 billion, comfortably ahead of withdrawals of $6.8 billion. Net cash inflow, contributions less withdrawals, was $6.4 billion.

The FMA put it plainly in its own Annual Report: KiwiSaver, “remained firmly in the accumulation phase.”

Transfers reshuffle the deck, they don’t shrink it

This is where the ANZ example becomes useful.

ANZ was one of the biggest net losers of members and dollars to competitors this year. But ANZ’s three KiwiSaver schemes still grew total funds under management by $1.1 billion, a 5.3 per cent increase, over the same twelve months. Contributions and investment returns more than covered the transfer losses.

It is not a one-off. ASB held its market share almost flat, shedding only 0.1 percentage points, while still growing funds under management by $2.1 billion, one of the largest nominal increases of any provider this year.

A provider can be a clear loser in the transfer competition and still be managing a growing pool of assets. Both things are true at once, and a headline built only around the first one is incomplete.

As the KiwiSaver XIX report notes, “The big-end of KiwiSaver town can keep shedding members at the current rate for many years yet, however, while still growing assets under management on the back of mandated flows and, in good times, investment returns.”

Why this distinction matters for fund management

A provider planning liquidity has to think in terms of gross flows, not net ones.

Contributions, transfers in, transfers out and benefit payments all move independently, on different timeframes, and often for different reasons.

The fact that the system as a whole is comfortably cash flow positive is a reassuring backdrop, but it says very little about the timing or concentration of outflows any single scheme might face in a given month or quarter.

That distinction sharpens considerably once a scheme holds meaningful exposure to illiquid assets, private equity, private debt, unlisted infrastructure and the like.

A private asset holding does not care whether the system overall is growing. It cares whether the scheme that holds it can meet redemptions and transfers without being forced to sell at the wrong time.

I have written previously about the case for alternatives in a well-diversified portfolio, and about the FMA’s recent work reviewing how private asset valuation and governance is being handled across the industry. See Post links below.

Both asset valuations and governance are worth revisiting with this point in mind, and I will return to the liquidity side of that picture, and what the FMA’s Annual Report says about it, in a follow-up post.

Modelling future flows should be standard practice

The FMA’s liquidity risk management guide requires stress testing against large withdrawals and extreme but plausible market scenarios. What it does not explicitly require is forward modelling of a scheme’s own net fund flows, growth as well as decline, under a range of future scenarios. That is a gap worth closing before the regulator closes it for you.

This matters more as private market allocations increase. A private market allocation is normally set and monitored as a percentage of total FUM. If net contributions slow, plateau, or reverse for a period, while the underlying private commitments remain largely fixed in dollar terms and illiquid, that percentage can drift upward without the manager doing anything at all. The current accumulation phase makes this feel like a remote risk. It should not be assumed to hold indefinitely.

I have managed portfolios with meaningful private market exposure where this kind of modelling was undertaken. The base case for these portfolios was a decline in FUM over time. A framework to actively manage private market exposures down over time was built to keep the portfolio within target limits. It is a straightforward discipline to build in advance. It is considerably harder to build in the middle of a liquidity event.

None of this requires new regulation to justify it. It is consistent with the governance, liquidity management and valuation focus the FMA already has in its 2024 guide and this year’s Annual Report.

Large KiwiSaver managers increasing private market allocations would do well to have this modelling in place well ahead of any FMA expectation that they do so.

A cushion, not a guarantee

None of this is an argument that KiwiSaver providers can be complacent about liquidity.

The accumulation phase gives the industry room to absorb competitive churn today, but it is a point-in-time observation about the system, not a permanent feature of it, and not a substitute for genuine liquidity planning at the individual scheme level.

The lesson from this year’s data is not that transfers don’t matter. It is that the transfer story and the growth story are two different things, and a provider, or an investor, who only follows the first is missing half the picture.

Further reading

For more on how alternatives fit into a well-diversified portfolio, see A Framework for Including Alternatives into a Portfolio.

For the FMA’s recent review of how private asset valuation and governance is being handled across New Zealand managed funds, see FMA report on private assets in New Zealand managed funds.

FMA Liquidity Management Guide: Liquidity risk management guide

Sources: FMA KiwiSaver Annual Report 2026, and KiwiSaver XIX, Investment News NZ

Happy investing.

Disclosure

Please read the Kiwi Investor Blog Disclosure Statement before relying on any information in this post. This blog is written for information and discussion purposes only. Nothing in this post constitutes financial advice. All investment strategies involve risk, including the loss of principal. Readers should seek independent financial advice before making any investment decisions. The views expressed in this post are my own and do not represent the views of my employer or any organisation with which I am affiliated.

Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.

FMA report on private assets in New Zealand managed funds

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The FMA does a lot of good work, and their recently released report, Private assets in managed funds – Investment landscape and valuation practices (April 2026), is a good example of that. In my view this is a timely report in the evolution of the New Zealand investment industry. Private markets will play an increasing role within portfolios across the sector, including KiwiSaver funds, and the FMA will have an important role to play as the industry matures and these asset classes become more mainstream.

You can access the full report here.

As private asset allocations grow globally and as interest from local fund managers increases understanding current practices and where risks may emerge is useful groundwork. This is also relevant with the growth in New Zealand’s Active Investor Plus (AIP) programme (the investment visa category designed to attract capital into New Zealand).

The FMA surveyed 30 managed investment scheme (MIS) managers in July 2025, with 16 responding. Of those, seven reported some exposure to private assets.

What are private assets?

Private assets are investments not traded on public exchanges. They span five main categories: private equity (shares in unlisted companies), venture capital, private debt (credit), private real estate, and private infrastructure.

Globally, private markets have grown dramatically, more than tripling over the past decade to around $15 trillion and are forecast to double again in the coming decade.

Historically, access to private assets has been the domain of large institutional investors: sovereign wealth funds, endowments, and superannuation funds. But technological and regulatory developments are steadily opening these markets to retail investors, with the retail share of private markets estimated to rise dramatically by 2032.

New Zealand’s current exposure to private assets is low

Private assets represent just 2.4% of total KiwiSaver assets under management as at the June 2025 quarter. For context, Australian pension funds allocate around 16% to private assets. Among the funds surveyed that do hold private assets, the average allocation sits under 5% of total assets under management, with 82% of those funds below a 10% allocation.

Figure 1 from the FMA report is presented below. “Private assets as a percentage of total KiwiSaver AUM”.

All graphs in this Blog post are from the FMA report.

Investment in private assets is growing, but from a very low base

Five of the seven managers with private asset exposure have been investing in them for at least five years, suggesting this is a considered long-term strategy rather than a recent trend. Six of those seven plan to expand their allocations over the next three years. A further three managers currently without private asset exposure indicated they may begin investing in them.

How are managers gaining their private asset exposure?

Managers access private assets either directly (holding the asset themselves) or indirectly through third-party fund managers. Most of those investing in private assets use both approaches.

Direct investments are larger in total value, over $1 billion disclosed. Real estate equity is the dominant asset class at over $450 million, followed by private debt and private equity.

Indirect investments are more varied, with venture capital gaining traction in recent years, though average investment values remain modest at around $9 million per holding. Despite having the most investments by number, private equity dominates indirect holdings by value at over $162 million.

What did the FMA find on valuation practices?

Valuation of private assets is more complex than for listed investments. There is no daily market price for private assets like there is for public securities listed on sharemarkets and for debt securities traded over the counter.

Private assets managers use methodologies such as income-based, market-comparable, or asset-based approaches.

For directly held private assets, most managers are using independent valuers, cross-checking valuations using multiple methodologies, and maintaining separation of duties between those preparing and those approving valuations. Most are also following internationally recognised guidelines such as the IPEV (International Private Equity and Venture Capital Valuation) guidelines.

For indirectly held assets, most managers make valuation methodology an important part of their due diligence on third-party managers, and have processes to test the reasonableness of valuations they receive.

The FMA identified several areas worth monitoring as allocations increase:

  • Some private assets are only valued annually, creating the risk of stale pricing, particularly for investors transacting just before or after a valuation date. Quarterly appears to be the emerging international standard.
  • Not all managers have formal provision for out-of-cycle valuations, which is a gap given the requirement for daily unit pricing in KiwiSaver.
  • For some indirect holdings, managers have limited visibility over the inputs and assumptions used by third-party valuers.
  • Investor communication about how private asset valuations flow through to unit prices is inconsistent, only three of six managers with indirect holdings said they regularly communicate with investors on this.

Why this matters for New Zealand investors

As this blog has covered extensively, New Zealand investors have historically had very limited exposure to private assets (private equity, infrastructure, private debt, and real assets) that have underpinned strong long-run performance from the world’s leading endowment funds, sovereign wealth funds, and superannuation schemes.

The gap with Australia remains significant. At 2.4% versus roughly 16%, this is a structural difference in how retirement savings are invested. Whether that gap closes, and how quickly, will depend on fund managers being confident they have the right governance, valuation, and risk management frameworks in place to do it well. Therefore, the FMA report is a timely and useful contribution to that conversation.

The direction of travel is clear. Six of seven managers surveyed plan to grow their private asset allocations, and global private markets continue to expand. Getting the foundations right now, while allocations are still modest, is the sensible approach.

Relevance for New Zealand’s Active Investor Plus programme

This report also has direct relevance for participants in New Zealand’s Active Investor Plus (AIP) programme, the investment visa category designed to attract growth-oriented capital into New Zealand.

The AIP programme’s Growth category is heavily weighted toward private markets. Eligible investments include private equity, private debt, and venture capital, the asset classes that sit at the heart of this FMA report. For many AIP investors, managed funds investing in these areas are a natural and practical pathway to meeting their investment requirements, and the amounts flowing into this part of the New Zealand funds management industry are growing significantly.

That growth matters beyond the AIP programme itself. The capital flowing in through this channel is helping to build the scale and capability of New Zealand’s private equity and private debt managers. Private debt in particular stands to benefit. As local managers build longer track records, deeper expertise, and more robust operational infrastructure, including the valuation governance frameworks examined in this FMA report, the asset class becomes more credible and accessible for a broader range of Kiwi investors.

This has important long-term implications. A more developed and well-governed private markets sector in New Zealand creates the conditions for greater acceptance of these asset classes within KiwiSaver funds and client portfolios more broadly. The hurdles to inclusion, concerns around illiquidity, valuation complexity, and governance, become easier to address as the industry matures. In that sense, the AIP programme is not just meeting the needs of a specific category of investor; it has the potential to contribute to the development of a more diversified and sophisticated investment ecosystem that will ultimately benefit all New Zealand investors.

That makes the FMA’s decision to examine valuation practices now, before allocations grow substantially within KiwiSaver, well timed. A well-functioning private markets sector is in the interests of all participants, including the growing number of AIP investors who are making New Zealand private assets a meaningful part of their portfolios in some instances.

Further reading: why Kiwi investors may be missing out

If you’d like to understand more about the case for alternatives, which includes private assets, in a diversified portfolio, and why New Zealand investors have historically been underexposed, the following posts from the Kiwi Investor Blog are worth revisiting:

A framework for including alternatives in a portfolio — Provides a practical framework for thinking about how alternative assets, including primate markets, can be incorporated into a diversified portfolio. Covers the key considerations around asset class selection, portfolio construction, and implementation, and makes the case for why a structured and deliberate approach to alternatives, rather than ad hoc allocations, is more likely to deliver the diversification and return benefits that these asset classes can offer.

Are KiwiSaver Funds, NZ Endowments, and Family Offices missing out on the benefits of Private Investment?  Makes the case that KiwiSaver funds are significantly underweight private investments and alternatives relative to Australian peers, and the implications for long-run portfolio performance.

KiwiSaver Balanced Fund strategic asset allocation analysis  A detailed look at how New Zealand balanced funds are constructed, showing the heavy reliance on equities as the dominant growth driver, contrasted with the more diversified approach of comparable Australian funds.

Optimal private equity allocation  Covers research on building and maintaining a private equity allocation within a well-diversified portfolio, and why many KiwiSaver providers may be overestimating their liquidity constraints.

Adding alternatives to an investment portfolio  A foundational post on the diversification benefits of alternatives, covering downside protection and the case for broadening asset class exposure beyond traditional equities and fixed income.

Happy investing.

Disclosure

Please read the Kiwi Investor Blog Disclosure Statement before relying on any information in this post. This blog is written for information and discussion purposes only. Nothing in this post constitutes financial advice. All investment strategies involve risk, including the loss of principal. Readers should seek independent financial advice before making any investment decisions. The views expressed in this post are my own and do not represent the views of my employer or any organisation with which I am affiliated.

Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.

A Framework for Including Alternatives into a Portfolio

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Over the years Kiwi Investor Blog has covered alternatives and the benefits they can bring to a well-diversified portfolio. What I have not done is provide a practical framework for how to actually introduce them.

This post attempts to do that. It is not a complete list. Think of it as a starting point.

A word on scope first. This is not an argument against equities and bonds. They will remain the core of most well-constructed portfolios and rightly so.

The case for alternatives is about enhancing those exposures, improving the overall risk and return profile of a portfolio, and building a portfolio that is more resilient across a range of different market environments.

The inclusion of alternatives is additive, not a replacement. Portfolio evolution, not revolution.

A Different Mindset Is Worth Considering

Successfully introducing alternatives into a portfolio is as much about mindset as it is about manager selection or asset allocation. The mindset question comes first.

A return-focused approach to investing, where the primary goal is maximising returns, beating a benchmark, or ranking well against peers, is a perfectly reasonable starting point for a traditional portfolio of equities and bonds. Returns are visible, measurable, and easy to communicate. There is nothing wrong with this orientation.

When it comes to including alternatives, a somewhat different way of thinking tends to be more useful. The investors who have most successfully built alternatives into their portfolios have generally approached the question from the perspective of risk and resilience first, with return as the outcome rather than the objective. The shift is subtle but it matters.

Rather than asking “how do we get more return?”, the question becomes “how do we build a portfolio that holds up well across a range of economic environments, and what role can alternatives play in that?” It is a different frame, and it opens up different possibilities.

This mindset is also consistent with maximising returns and ranking well against peers. Actually, it could be argued this mindset increases the probability of achieving these objectives.

This point is worth dwelling on, because it is subtle but important. Expected return is a single number, a central estimate of where a strategy might land on average. What an investor actually experiences, however, is just one outcome from a wide range of possibilities. A strategy with a higher expected return but a wide spread of potential outcomes may, in practice, have a lower probability of meeting a given return target than a strategy with a slightly lower expected return but a narrower spread.

Including alternatives can increase the probability of achieving an objective, even where the expected return of the portfolio is similar, or modestly lower. By reducing volatility around that expected return, alternatives can narrow the range of likely outcomes, which in turn lifts the probability of landing at or above whatever return is actually required. The goal shifts from maximising expected return to maximising the probability of achieving the return that is needed, a subtly different objective, but one that tends to align more closely with what investors are actually trying to do.

We will expand on this below, as alternatives have different roles to play in a well-diversified portfolio.

Anchoring to Goals and Outcomes Over the Cycle

This mindset shift is perhaps the most practical: moving from benchmark-relative thinking to goal-based thinking. Rather than measuring success against an index, the focus is on achieving clearly defined risk and return outcomes over the full market cycle. A market cycle is typically five to seven years.

The questions this raises are straightforward but important. What does the portfolio actually need to achieve? What income needs to be generated, and when? What level of drawdown is genuinely tolerable? What does success look like at the end of the investment horizon?

These questions are applicable for all investors, including KiwiSaver funds, those planning for retirement, charitable trusts, and ultra-high net worth individuals.

These different investors will have different answers. A charitable endowment might need to preserve real capital while distributing 4–5% per annum. A KiwiSaver member approaching retirement might prioritise avoiding a sharp drawdown in the final years before withdrawal. A family office might focus on inflation protection and multi-generational income. Each implies a different portfolio.

This longer-term, outcome-oriented framing is also what creates the right conditions for alternatives to be included. Once success is measured over a cycle rather than a quarter, the illiquidity of private markets becomes more of a feature than a constraint.

The investors who have thought carefully about their genuine liquidity needs, and found they can afford to look through short-term fluctuations, have generally been rewarded for it.

From Asset Allocation to Risk Allocation

A natural extension of this thinking is to consider not just how capital is allocated across asset classes, but how risk is allocated.

In a traditional 60/40 portfolio, roughly 90% of the portfolio’s volatility comes from equities, even though equities represent only 60% of the capital. The portfolio looks diversified on paper but is, in terms of risk, heavily concentrated. Making this visible is a useful exercise: it often motivates a genuine rethink of what diversification actually means in practice.

As I have written previously on this blog, true portfolio diversification does not come from investing in many different asset classes, it comes from investing in different risk factors. That is a foundation principle.

True diversification requires exposure to different risk factors. That is what alternatives, thoughtfully selected, can provide.

Designing for a Range of Environments

One of the most helpful ways to think about portfolio construction, and one that lends itself naturally to the inclusion of alternatives, is to design for uncertainty rather than optimise for a single forecast. Markets move in ways that surprise us. Economic conditions shift. What works well in one environment may struggle in another.

A useful starting point is to consider how a portfolio would perform across different economic conditions: periods of rising growth, falling growth, rising inflation, and falling inflation.

No single asset class does well in all four. Equities tend to thrive in rising growth and benign inflation. Bonds provide ballast in slowing growth and deflation. Real assets and inflation-linked securities come into their own when prices are rising.

A portfolio with some exposure across all of these environments is likely to be more resilient over time than one concentrated heavily in just one or two.

This way of thinking naturally leads to a broader set of portfolio building blocks, and alternatives, thoughtfully chosen, are part of that broader investment set.

Thinking About Downside, Not Just Upside

Another useful shift is to give more weight to downside protection. Returns compound, and losses interrupt compounding. A portfolio that falls 50% needs to gain 100% just to recover. Avoiding large drawdowns is not timidity; it is one of the more powerful tools available to long-term investors.

Thinking about the conditions under which a portfolio might suffer badly, and whether those risks have been adequately addressed, is a worthwhile complement to thinking about return potential. It does not mean avoiding risk. It means being deliberate about which risks are taken, and ensuring the portfolio is not unduly exposed to a single adverse scenario.

This framing also helps evaluate alternatives more clearly. A trend following strategy, for example, is often most useful not because it outperforms equities but because it tends to hold up, or even contribute positively, when equities are under stress. Evaluating alternatives on those terms, rather than purely against a return benchmark, tends to lead to better portfolio construction decisions.

A Framework for Thinking About Alternatives

Alternatives are not a monolith. Each category serves a different purpose within a portfolio, and understanding those purposes is critical to building a coherent strategy.

As Preqin have noted, investors’ motivations for investing in alternatives are quite distinctive. A useful way to think about this is through the lens of what each alternative brings to the table.

Private Equity — Access to companies and growth opportunities not available on public markets. The evidence for long-run outperformance over listed equities is well established, particularly among top-quartile managers. The trade-off is illiquidity and manager selection risk. Private equity rewards investors with long time horizons and the patience to stay the course.

Infrastructure (Unlisted) — Real, long-duration assets (e.g. toll roads, utilities, airports, renewable energy) that generate stable, predictable cash flows, often with inflation linkage. For portfolios with long-term income objectives, unlisted infrastructure is particularly compelling. It also tends to have lower correlation with listed markets, which is precisely the point.

Private Debt — Loans and credit instruments made outside the public bond markets. Private debt has grown substantially since the global financial crisis as banks retrenched from certain lending markets. It typically offers a meaningful yield premium over public credit in exchange for illiquidity, an attractive trade for investors who do not need immediate access to their capital.

Hedge Funds (and Alternative Risk Premia) — A broad category, but at their best, hedge fund strategies can provide genuine diversification: returns that are lowly correlated with both equities and bonds. Managed futures, global macro, and market-neutral strategies have historically performed well precisely when traditional portfolios have struggled. Not all hedge funds deliver on this promise. Manager selection and fee discipline matter enormously here.

The Attraction of Alternatives

Alternatives are generally added to portfolios for two primary reasons.

  • Enhance returns — for example, private equity and venture capital, where the objective is to access return premiums not available in public markets.
  • Diversification — for example, hedge funds and liquid alternatives, used to reduce portfolio declines at times of severe sharemarket falls.

Inflation hedging and yield enhancement are other reasons for allocating toward alternatives.

The motivations behind each allocation are quite distinctive. A Preqin survey of institutional investors found that investors’ reasons for holding different alternative asset classes vary considerably depending on the role each is expected to play in the portfolio. I covered this in more detail in Further growth expected for an Alternative future – Preqin.

The table below summarises the key findings.

Alternative Asset ClassPrimary Investor Motivations
Private Equity and Venture CapitalHigh absolute and risk-adjusted returns
Infrastructure and Real EstateAn inflation hedge and a reliable income stream
Private DebtHigh risk-adjusted returns and an income stream
Hedge FundsDiversification and low correlation with other asset classes
Natural ResourcesDiversification and low correlation with other asset classes
Insurance-Linked SecuritiesIncome and diversification

What stands out from this table is that no single alternative is being held for the same reason. Some are held for return enhancement, some for income, some for inflation protection, and some purely for diversification. This reinforces the broader point made: alternatives are not a single decision but a set of distinct building blocks, each chosen for a specific role within the overall portfolio.

Consistent with the above commentary, the following graph presents the rationale for investing in alternatives based on the CAIA Members surveyed in 2020.

Practical Considerations: Liquidity, Fees, and Manager Selection

Moving into alternatives is not without complexity. Three issues deserve careful consideration.

Liquidity is the most important starting point. Before allocating to illiquid strategies, investors should rigorously assess their true liquidity needs, not their perceived needs, but their actual cash flow requirements over a 5–10 year horizon. Liquidity should be treated as a budget: deploy it wisely.

Fees in alternatives are higher than in traditional asset classes, and that is a legitimate consideration. But higher fees are not automatically a problem. What matters is the return after fees. A private equity fund that delivers 4–5% above public equity returns net of all costs is clearly worthwhile. Every alternative should be assessed on its after-fee contribution to the portfolio. For a more detailed discussion on fees and alternatives, please see my previous post Investment Fees and Investing like an Endowment – Part 2.

Manager selection matters far more in alternatives than in listed markets. The spread between top-quartile and bottom-quartile private equity managers, for example, is enormous, far greater than the equivalent spread in traditional asset classes. Gaining access to top-tier managers is both critical and, for many smaller investors, genuinely challenging. Although fund-of-funds structures, co-investment platforms, and specialist advisers can all play a role here, the layering of fees and risk exposures is important, e.g. the liquidity framework.

Where to Start

For investors new to alternatives, a phased approach is sensible. A reasonable starting point for a medium-to-long-term investor might include the following:

  • Set a target allocation of 10–15% as an initial ambition, with the intention to build over time as governance capability and manager relationships develop.
  • Start with the most accessible categories. Unlisted infrastructure, private equity, and private debt tend to be more straightforward entry points than hedge funds. They are also easier to explain to stakeholders.
  • Build governance capability first. Alternatives require more active oversight, deeper due diligence, and clearer investment policy frameworks than listed strategies.
  • Commit across vintages. Private markets operate on multi-year cycles. Spreading commitments across different vintage years reduces timing risk significantly.

Pulling It Together

The argument here is not that equities and bonds should be abandoned, far from it. They remain the foundation of a well-constructed portfolio.

The argument is that a portfolio composed only of equities and bonds is leaving risk-adjusted return potential on the table, and accepting a concentration of risk that long-term investors can afford to reduce.

The mindset shift comes first: from a focus on return to one of risk management and resilience, from benchmark-beating to goal achievement, from optimising for one environment to building a portfolio that can perform across many. The framework for alternatives follows naturally from that shift.

The world’s best long-term investors understood this a long time ago. The opportunity for New Zealand investors, whether managing KiwiSaver assets, endowment funds, or family wealth, is to apply the same thinking here. The evidence is clear. The framework exists.

Happy investing.

Disclosure

Please read the Kiwi Investor Blog Disclosure Statement before relying on any information in this post. This blog is written for information and discussion purposes only. Nothing in this post constitutes financial advice. All investment strategies involve risk, including the loss of principal. Readers should seek independent financial advice before making any investment decisions. The views expressed in this post are my own and do not represent the views of my employer or any organisation with which I am affiliated.

Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.

Welcome Back — and Welcome

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This Is What Kiwi Investor Blog Is About.

Ten essential posts. The ideas that define this blog. A guide for new readers and a reminder for those who have been here before.

After five years away, this post reintroduces Kiwi Investor Blog: what it is, what it is trying to do, and where to start if you are new. Rather than simply listing posts, it curates ten of the blog’s most read and enduring pieces and explains, for each one, why the idea matters, what it challenges, and what a thoughtful investor should take away from it. If you have been here before, think of this as a reset. If you are new, think of it as a guided introduction to a set of ideas that most mainstream New Zealand financial commentary does not cover.

What Kiwi Investor Blog is — and what it is trying to do

Kiwi Investor Blog started from a simple observation: there is a gap between how the world’s best institutional investors think about building and managing investment portfolios, and what is available to most New Zealand investors in the way of independent commentary, research, and analysis.

The large global pension funds, endowments, sovereign wealth funds and insurance companies that manage hundreds of billions of dollars collectively have access to world-class research, sophisticated portfolio construction frameworks, and decades of accumulated experience in areas that barely feature in mainstream New Zealand investment conversation.

This blog’s purpose is to close that gap. Not by dumbing ideas down, but by translating concepts, frameworks, and research that institutional investors use routinely and making them accessible, relevant, and practically useful for a wider New Zealand audience.

The topics that most NZ financial commentary doesn’t cover — and why they matter

Mainstream personal finance commentary in New Zealand is overwhelmingly focused on a narrow set of topics: KiwiSaver fund selection, property versus shares, mortgage strategy, and the basics of budgeting. These are all very worthwhile subjects and covered well. But they represent a small fraction of the investment landscape that a thoughtful investor needs to navigate.

Kiwi Investor Blog has, since its inception, focused on topics that are discussed in institutional investment circles but are largely absent from the broader NZ investment conversation:

  • Behavioural finance — the systematic ways in which investor psychology undermines investment outcomes, and how to design against it.
  • True diversification — what it actually means to hold a portfolio whose components behave differently from each other, and why most ‘diversified’ funds are less diversified than they appear.
  • Alternative investments — the role of hedge funds, private equity, real assets, and liquid alternatives in building more robust portfolios, and why New Zealand investors have historically had limited access to them.
  • Liability-driven investing — the framework used by insurance companies and some pension funds to match assets to income needs, applied to the challenges facing individual NZ investors approaching and in retirement.
  • The limitations of the balanced fund — why the standard 60/40 portfolio carries more risk than investors fully appreciate, and what more robust alternatives look like.
  • Fees and their compounding effect — why even small fee differences are large in the long run, and how to read an investment fee disclosure with clear eyes.

None of these topics is especially complex. But none of them gets the sustained, rigorous treatment in NZ financial media that they deserve. That is the gap this blog exists to fill.

Ten essential posts — a guided tour of the blog’s core ideas

The following posts are selected from the blog’s archive based on two criteria: enduring relevance (the ideas are as important today as when they were written) and distinctive value (the content covers ground that is not widely available elsewhere in the NZ investment commentary landscape). They are presented with a summary of the key argument and the single most important insight for a reader to take away.

Post 1  ·  BEHAVIOURAL FINANCE

1. The Benefits of Behavioural Finance in the Investment Planning Process

Why do smart, well-informed investors consistently make the same predictable mistakes? Behavioural finance is the field that answers that question by drawing on psychology and economics to explain why human beings are systematically poor at managing money, even when they know better. This post introduces the key concepts of loss aversion, overconfidence, herding, and recency bias and explains how awareness of these tendencies can be built into the investment planning process itself. It remains the most-read post in the blog’s history for good reason: the insights are universal, timeless, and directly actionable.

Key insight:  Knowing that markets are irrational is useless if your own behaviour is equally irrational. The goal of behavioural finance is not just to understand markets but to also understand yourself as an investor.

→  Read: The Benefits of Behavioural Finance

Post 2  ·  PORTFOLIO CONSTRUCTION

2. A Short History of Portfolio Diversification

Diversification is the only free lunch in investing. That phrase is used so often it has lost its meaning. This post traces the intellectual history of diversification from Harry Markowitz’s 1952 mean-variance framework through to modern multi-asset portfolio construction, explaining not just what diversification means but why it works, when it doesn’t, and what institutional investors have learned about it over seven decades of practice. It is a foundational piece for any serious investor.

Key insight:  True diversification is not about holding many assets. It is about holding assets whose returns are driven by genuinely different economic forces. A portfolio of 20 funds all exposed to the same equity risk premium is not diversified.

→  Read: A Short History of Portfolio Diversification

Post 3  ·  PORTFOLIO CONSTRUCTION

3. Disaggregation of Investment Returns

One of the most practically useful posts on the blog — and one of the most underappreciated. Most investors think of their portfolio return as a single number. This post explains how that return can be decomposed into its component parts: the market beta, the factor exposures, the manager skill (alpha), and the fees extracted at each layer. Understanding which part of your return is coming from where is the foundation of intelligent portfolio evaluation. It is a concept that institutional investors use routinely and that is almost entirely absent from retail investment commentary in New Zealand.

Key insight:  Before you can assess whether your investment manager is adding value, you need to understand what portion of their return you are already paying for through passive exposure and what, if anything, is left over after fees.

→  Read: Disaggregation of Investment Returns

Post 4  ·  PORTFOLIO CONSTRUCTION

4. The Traditional Diversified Fund Is Outdated — Greater Customisation Is Required

The one-size-fits-all balanced fund has been the default vehicle for New Zealand investors for decades. In most cases this suits investors well. This post makes the case for greater portfolio customisation to reflect the investor’s specific risk tolerances, time horizons, liability profiles, and income objectives. The argument draws on how large institutional investors such as pension funds, endowments, and sovereign wealth funds think about portfolio construction, and asks why individual investors are routinely offered something less sophisticated.

Key insight:  The institution managing a $10 billion pension fund does not use a balanced fund. It builds a portfolio around the specific liabilities it needs to meet. Sophisticated individual investors have specific financial goals too, and their portfolios should reflect them.

→  Read: The Traditional Diversified Fund Is Outdated

Post 5  ·  BEHAVIOURAL FINANCE

5. The Psychology of Portfolio Diversification

A companion piece to the behavioural finance post, focused specifically on how psychological biases affect the way investors think about and implement diversification. Home bias, the tendency to overweight familiar domestic assets, familiarity bias, mental accounting, and the illusion of diversification (holding many funds that are all highly correlated) are explored in detail. The post bridges theory and practice in a way that is immediately useful for investors reviewing their own portfolios.

Key insight:  New Zealand represents less than 0.2% of global equity market capitalisation. A portfolio that over-invested in NZ assets is not diversified; it is a concentrated bet on a single small economy.

→  Read: The Psychology of Portfolio Diversification

Post 6  ·  FEES & COSTS

6. Five Myths About Investment Management Fees — Broadening the Fee Debate

Fees are the single most controllable variable in long-term investment outcomes, yet they are consistently misunderstood, underestimated, and obscured by the investment industry. This post takes on five of the most persistent myths about investment management fees, including the idea that higher fees reflect higher quality, that fee differences of less than 1% are immaterial, and that all fees are disclosed in a way that allows meaningful comparison. It is a post that will save most readers money simply by changing how they read a fund disclosure document.

Key insight:  A fee difference of 0.5% per annum appears small. Over 30 years of compounding on a $200,000 portfolio, it is worth approximately $85,000 in foregone wealth. Fees compound in exactly the same way as returns, but in reverse.

→  Read: Five Myths About Investment Management Fees

Post 7  ·  RISK & PORTFOLIO THEORY

7. Understanding the Impact of Volatility on Your Portfolio

Volatility is the most widely cited measure of investment risk and one of the most widely misunderstood. This post explains not just what volatility means statistically, but why the path of returns matters as much as their average level, a concept with profound implications for retirement investors in particular. The mathematics of volatility drag, the asymmetry between gains and losses, and the practical consequences for portfolio construction are all covered in a way that builds genuine intuition rather than just presenting formulas.

Key insight:  A portfolio that falls 50% needs to rise 100% to recover. This asymmetry, not widely appreciated by investors, is why managing downside risk is not the same as being conservative. It is the foundation of intelligent risk management.

→  Read: Understanding the Impact of Volatility on Your Portfolio

Post 8  ·  PORTFOLIO CONSTRUCTION

8. Time to Move Away from the Balanced Portfolio — They Are Riskier Than You Think

Written before the events of 2022 made its argument unavoidable, this post explains why the traditional 60/40 balanced fund carries more risk than investors typically appreciate. The equity risk dominance of the balanced portfolio and the fact that in almost any significant market downturn, the balanced fund falls alongside equities is laid out clearly. The conditions under which bonds genuinely diversify equity risk are examined, along with the circumstances in which that diversification fails. Events since 2022 have provided a live demonstration of precisely the argument this post made.

Key insight:  In 49 of the last 50 years, when the US equity market fell, a 60/40 balanced portfolio also fell. The 40% in bonds has provided partial cushioning, but it has never been a genuine alternative to equity risk management.

→  Read: Time to Move Away from the Balanced Portfolio

Post 9  ·  BEHAVIOURAL FINANCE

9. The Regret-Proof Portfolio

One of the most distinctive posts on the blog and one that addresses a dimension of investing that almost no one in the industry discusses seriously. Regret is a powerful emotion in investment decision-making: the regret of having sold before a rally, of having stayed in a falling market, of having chosen the wrong fund. This post proposes a framework for thinking about portfolio construction that accounts for the investor’s own emotional responses not to indulge them, but to design a portfolio the investor can actually stick with through market cycles. A portfolio that is technically optimal but behaviourally unsustainable is not actually optimal.

Key insight:  The best investment strategy is not the one with the highest expected return. It is the one you will actually implement, hold through downturns, and not abandon at the worst possible moment. Regret minimisation is a legitimate and underused design principle.

→  Read: The Regret-Proof Portfolio

Post 10  ·  RETIREMENT INCOME

10. More on Liability Driven Investing (LDI) for Beginners

Liability-driven investing is the framework that the world’s largest insurance companies and pension funds use to manage the challenge of converting an asset pool into a reliable income stream. In New Zealand, it is almost entirely absent from the mainstream conversation about retirement planning. LDI is directly applicable to the situation facing every KiwiSaver member approaching retirement. This post introduces the core concept in plain English: rather than asking ‘how do I maximise returns?’, LDI asks ‘what income do I need, when do I need it, and how do I build a portfolio that reliably delivers it?’ It is the intellectual foundation for this blog’s approach to retirement income, and remains as relevant today as when it was written.

Key insight:  Every investor approaching retirement has liabilities: the income they will need each year to fund their lifestyle. LDI matches assets to those liabilities explicitly. It is not exotic or complex. It is simply asking the right question first.

→  Read: More on Liability Driven Investing for Beginners

Further posts are planned across the blog’s core topics of behavioural finance, portfolio construction, alternatives, and retirement income.

A note to returning readers

If you subscribed to this blog before 2021 and found your way back: thank you. A lot has happened in markets over the past five years that this blog warned about, and a lot has changed that is worth examining together. The core thesis of this blog has not changed: that institutional-quality thinking, made accessible and applied honestly to the NZ investment landscape, is genuinely valuable to all investors. If anything, the events of 2022–2026 have reinforced rather than undermined that view.

If you are new: welcome. Start anywhere on the list above. The posts are independent of each other and do not require prior knowledge of the blog. What they do require is a willingness to engage with investment ideas, to question conventional wisdom, to think in frameworks rather than rules of thumb, and to accept that good investment thinking is demanding but not inaccessible.

The gap between how institutional investors think about this and what most New Zealanders have access to is real. This blog’s aim is to narrow it, one post at a time.

Kiwi Investor Blog covers portfolio construction, behavioural finance, alternative investments, retirement income, and KiwiSaver from an independent, institutional perspective. It does not constitute financial advice.

Please read the Disclosure Statement on the blog before relying on any content. The views expressed are those of the author personally and do not represent the views of their employer or any organisation with which the author is affiliated.

Disclosure

Please read the Kiwi Investor Blog Disclosure Statement before relying on any information in this post. This blog is written for information and discussion purposes only and does not constitute financial advice. All investment strategies involve risk, including the loss of principal. Readers should seek independent financial advice tailored to their individual circumstances. The views expressed are those of the author personally and do not represent the views of their employer or any organisation with which the author is affiliated.

The 60/40 Portfolio Five Years On and What Has Changed?

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Kiwi Investor Blog  ·  kiwiinvestorblog.com  ·  Revisiting the balanced portfolio, rising rates, and the bond-equity correlation regime we are now in.

Introduction

For most of the past two decades, holding both shares and bonds in a balanced portfolio provided a natural cushion: when shares fell, bonds typically rose. That cushion largely disappeared between 2022 and 2024. In this post, I revisit what happened, why it matters, and what a recent AQR article suggests investors should consider when thinking about portfolio positioning in the current environment.

After five years away — a return to the scene

It has been almost five years since my last post on Kiwi Investor Blog. A lot has changed, and, in some respects, a great deal has confirmed what many of us in the investment community were highlighting in 2020 and 2021, after a period of ultra-low interest rates.

Back then, the central argument of this blog was straightforward: the traditional 60/40 balanced portfolio was riskier than many investors appreciated.

The events of the past five years have provided a live test of those concerns.

What happened between 2022 and 2025: a brief recap

The period from early 2022 through to mid-2023 was one of the most challenging in decades for holders of traditional balanced portfolios:

  • Inflation surged globally, reaching multi-decade highs. The Reserve Bank of New Zealand raised the Official Cash Rate from a historic low of 0.25% in late 2021 to a peak of 5.50% by mid-2023.
  • Global bond markets suffered their worst losses in a generation on the back of sharply higher interest rates. As a result, the very asset class investors had long relied upon to cushion sharemarket falls was itself falling hard.
  • Sharemarkets also declined significantly in 2022. This meant both shares and bonds fell simultaneously. Unfortunately, the classic diversification benefit of the 60/40 portfolio simply did not materialise.
  • KiwiSaver balanced funds had a difficult 2022. Many New Zealand investors experienced meaningful negative returns in their retirement savings for the first time in years.
  • Markets recovered strongly in 2023 and 2024, led by a narrow group of US technology stocks. Bond returns remained subdued relative to historical norms.
  • Global sharemarkets performed strongly in 2025, again predominately led higher by a narrow range of large cap technology companies.

In short: the traditional balanced portfolio proved riskier than many investors had assumed, and bonds failed to play their expected defensive role when it mattered most.

A longer view: the negative stock-bond correlation was never the historical norm

Before turning to AQR’s recent research, it is worth pausing on an important piece of historical context that is often overlooked in discussions about portfolio construction.

The negative correlation between shares and bonds, the relationship that made the 60/40 portfolio so effective for two decades, has not been a permanent feature of financial markets.

As displayed in the graph below, the correlation between US shares and bonds turned negative following the 2000 dot-com sharemarket crash and has persisted for two decades because of falling interest rates, low and stable inflation, and repeated central bank intervention.

For most of the twentieth century prior to that shares and bonds moved together, not apart. A positive stock-bond correlation was the norm, not the exception.

Source: AQR

This matters enormously for how investors should think about the current environment. The question is not simply whether the correlation has changed but whether the conditions that produced the negative correlation regime are likely to return. And here the outlook is sobering.

The structural forces that drove four decades of falling interest rates and bond outperformance have largely reversed or are in the process of doing so. Geopolitical fragmentation, persistently high government debt levels across developed economies, and increased public spending on defence and infrastructure all point toward a structural environment of higher and less predictable inflation. Historically, these conditions have produced positive stock-bond correlations.

A return to the pre-2022 environment of reliably negative correlations would likely require either a significant market dislocation (a severe deflationary shock or financial crisis) or a fundamental reversal of these structural trends. Neither appears likely in the near term.

This is not a reason for despair. But it is a reason to think carefully about portfolio construction in a way that does not simply assume the conditions of 2000–2020 will reassert themselves.

For the avoidance of doubt, bonds remain a critical allocation within a well-diversified portfolio, particularly during periods of economic or market stress when equities can fall sharply. Their value lies not in delivering constant high returns but in reducing drawdowns, providing liquidity, and reducing volatility when risk assets are under pressure.

The real question is not whether bonds still matter but how to size the allocation and what additional diversifiers can be added to a portfolio to strengthen resilience across different economic and market environments.

AQR’s timely new research: what the data says

Against this backdrop, an article published on 8 April 2026 by AQR Capital Management is essential reading for anyone thinking seriously about portfolio construction. The article is titled “A Positive Stock-Bond Correlation Is a Terrible Reason to Add More Equity Risk to Your Portfolio”.

AQR observe that the share-bond correlation turned positive a few years ago, and that this shift has prompted a wave of industry advice about what investors should do in response. The chain of logic being presented to investors runs roughly as follows: bonds are now positively correlated with shares; they can therefore no longer diversify a portfolio; and so investors should sell bonds and replace them with something else. That “something else” has included private credit, buffer funds, and in some cases, even cryptocurrency.

AQR’s response to this reasoning is direct: the proposed alternatives typically carry significantly more shares-like risk than the bonds they are replacing. Far from improving diversification, AQR argue investors following this advice often end up with portfolios more exposed to sharemarket risk than before.

The data AQR present is striking. Over the five years to February 2026, government bonds carried an equity (shares) beta of approximately 0.2 (meaning for every dollar in bonds, investors received roughly 20 cents of equity market exposure). Private credit (proxied by listed Business Development Companies) carried a beta of 0.7,more than three times that of bonds. Buffer funds came in at 0.6. Bitcoin at 2.1. In each case, the proposed “bond replacement” carried substantially more equity risk than the asset it was meant to replace.

AQR also make a broader and equally important point. The 60/40 portfolio has always been dominated by equity risk. A good or bad year for shares has almost always determined whether it was a good or bad year for a diversified portfolio, regardless of what bonds were doing. The current environment has not created a new diversification problem. It has made an existing and longstanding one more visible.

On the future path of the correlation, AQR’s view is consistent with the structural analysis above. Where inflation uncertainty is the dominant macro driver, as both inflation news and growth news can move shares and bonds in the same direction when inflation is the primary concern (see AQR article below), the correlation is likely to remain positive. Only a genuine stabilisation of inflation expectations, or a large market dislocation that reactivates the traditional flight-to-quality dynamic in bond markets, would be expected to restore a reliably negative correlation. AQR note that recent geopolitical developments and the pressures on central bank independence make such a stabilisation uncertain.

What AQR’s research points toward

It is useful to summarise what AQR’s analysis suggests investors and their advisers should be thinking about.

The core conclusion is that the search for genuine diversification is not new, and should not be distorted by the recent correlation shift. The goal has always been to identify return streams that are structurally uncorrelated with equity market risk. AQR point to strategies that have demonstrated this quality in practice during the positive correlation period, including trend-following strategies (managed futures), which have a long track record of performing well during sustained equity drawdowns, and equity market neutral strategies, which seek returns from stock selection while neutralising broad market exposure.

What AQR argue firmly against is the substitution of bonds with assets that are simply equity risk in a different packaging. Private credit, structured products with equity-linked payoffs, and cryptocurrency all carry equity-like risk regardless of how they are labelled or marketed. Calling a strategy “private” or “defined outcome” does not change its underlying economic character.

For deeper reading: what drives the stock-bond correlation?

Readers who want to go further into the mechanics of why the stock-bond correlation changes over time will find an earlier AQR paper particularly valuable. Published in the Journal of Portfolio Management (March 2023), “A Changing Stock–Bond Correlation: Drivers and Implications” by Brixton, Brooks, Hecht, Ilmanen, Maloney, and McQuinn provides a rigorous macroeconomic framework for understanding what determines whether shares and bonds move together or apart.

The paper’s central insight is that the stock-bond correlation is not primarily driven by the level of inflation, but by the relative importance of inflation uncertainty versus growth uncertainty, and the relationship between the two. The key findings are as follows.

Opposite sensitivities to growth, similar sensitivities to inflation. Equities benefit from positive growth news while bonds suffer, so growth shocks push them in opposite directions. Inflation shocks, by contrast, hurt both asset classes, pushing them in the same direction.

What matters is the relative volatility of growth and inflation news. When growth uncertainty dominates, as it did during most of the 2000s and 2010s, the stock-bond correlation tends to be negative, meaning bonds provide genuine diversification. When inflation uncertainty dominates, as it did in the 1970s, 1980s, and 1990s, and again more recently, the correlation tends to be positive.

Alternatives can fill the diversification gap. The paper shows that if sustained inflation uncertainty drives the stock-bond correlation higher, investors can compensate by raising allocations to assets with structurally different return drivers. These assets include commodities (which benefit from inflation shocks rather than being hurt by them), trend-following strategies, and market-neutral approaches. This conclusion is directly consistent with the more recent AQR research discussed above.

The paper is freely available on the AQR website. For those wanting to understand the theoretical underpinnings of the correlation shift we are living through, it remains one of the clearest and most practically grounded treatments of the subject available: A Changing Stock–Bond Correlation: Drivers and Implications (AQR, 2023)

The bottom line

The April 2026 AQR article is a pointed rebuke of an investment industry that, in their view, is using a real and legitimate shift in the correlation regime as cover to sell products that simply add more equity risk under a different name. The core message is that the right response to a world where bonds diversify less effectively is not to add assets that diversify even less. As always, the objective is to find strategies with structurally different return drivers.

That conclusion aligns with the portfolio construction themes this blog has explored over the years, and it will continue to inform the analysis here going forward.

The era of reliably negative stock-bond correlations was the exception, not the rule.

Investors who plan for it to return may be waiting a long time. Those who build portfolios capable of navigating a wider range of market and economic environments are better placed for what lies ahead.

As always, I welcome comments, feedback, and questions from readers.

For further reading on these themes, please see earlier Kiwi Investor Blog posts on the role of alternatives in a robust portfolio, goal-based investing, and the limitations of the traditional balanced fund. The AQR article referenced in this post ‘A Positive Stock-Bond Correlation Is a Terrible Reason to Add More Equity Risk to Your Portfolio’ (April 8, 2026) is freely available at aqr.com. Readers are encouraged to read it in full

Disclosure

Please read the Kiwi Investor Blog Disclosure Statement before relying on any information in this post. This blog is written for information and discussion purposes only. Nothing in this post constitutes financial advice. All investment strategies involve risk, including the loss of principal. Readers should seek independent financial advice before making any investment decisions. The views expressed in this post are my own and do not represent the views of my employer or any organisation with which I am affiliated.

Generating stable and sustainable investment income

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I would like to share this blog post by AMP Capital New Zealand, Four pillars for generating income | AMP Capital, which looks at the four main pillars of an investment framework to deliver a stable and sustainable level of income over time.

The Post challenges some of the conventional wisdoms underpinning the management of traditional portfolios.

The basis of the framework is a goal orientated investment approach.

For those wishing to understand more around Goal Based Investing, this Wikipedia page, which I have contributed to, Goal-based investing may be of interest. The Wikipedia page includes:

  • A description of Goal Based Investing (GBI)
  • A comparison of GBI to traditional portfolio theory
  • History and development of GBI
  • GBI in principle
  • GBI for the retirement problem

Pease read my Disclosure Statement

 

Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.

Five Myths of About Investment Management Fees – Broadening the Fee Debate

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We need to change the conversation on investment management fees.  The debate on fees needs to be based on facts rather than myths. Despite often being framed in this way, the debate on investment management fees is not black versus white.

What matters is not the fee level, but the manager’s ability to deliver a satisfactory outcome to investors after fees. Either way, it is no good paying high fees or the lowest possible fees if your investment objectives have not been achieved. Therefore, amongst the key questions to ask are, are you satisfied with the investment outcomes after the fees you have paid? – have your investment objectives or retirement goals been achieved?

After fee returns are important.  Therefore, higher fee investment strategies should not necessarily be avoided if they can assist in meeting your investment objectives. In the current investment environment, the use of higher fee investment strategies may be necessary to achieve your investment objectives.

Therefore, Investors should focus on given the investment outcomes have I minimised the fees paid. 

In my mind, this would be consistent with the FMA’s value for money focus. (FMA is New Zealand’s Regulatory)

At the same time, fees should not be the overriding concern and investors must analyse fees in the overall context of managing their portfolios appropriately.

Investment management fee Myths

The 5 most common myths about investment management fees are:

  1. Fees should be as low as possible
  2. Incentive fees are always better than fixed fees
  3. High water marks always help investors
  4. Hedge Funds are where the alpha is.  They deserve their high fees
  5. You can always separate alpha from beta, and pay appropriate fees for each

This paper, Five Myths About Fees, address the above myths in detail.

Although all the myths are important, the myth that fees should be as low as possible probably resonates most with investors.

Investment management fees for active management are higher than index management and involve a wealth transfer from the investor to the investment manager.  This is a fact.

However, the paper is clear, investors should look to maximise excess returns (they term alpha) after fees.  Another way of looking at this, for a given level of excess returns, fees should be minimised.  This is an important concept when considering the discussion below around broadening the discussion on fees.

The paper also notes, investors should pay higher fees to those managers that are more consistent.  For example, if two managers provide the same level of excess return, but one does so by taking less risk, investors should pay higher fees to this manager (the manager who achieves the same excess return but with lower risk – technically speaking, this is the manager with the higher information ratio).

In summary, the take-outs on the myth fees should be as low as possible:

  • Fees must remain below expected excess returns e.g., a manager that charges active fees but only delivers enhanced index returns should be avoided.
  • Managers who consistently add value warrant higher fees.

In relation to do managers add value, see this Post, Challenging the Conventional Wisdom of Active Management.

The paper on the five fee myths is wide ranging.  It also provides insights into the key elements of the fee negotiation game and determining the conditions under which higher fees should be paid.

Key conclusions from the article, particularly after addressing Myth 4 & 5:

  • most investment strategies offer a combination of cheaply accessible market index returns (beta) and active management excess returns (alpha).  While many institutional investors look to separate beta and alpha for most investors this is too limiting and difficult.  Many talented investment managers appear in investment strategies which include both beta and excess returns (alpha).
  • Investors should consider fees before deciding on an investment strategy, not look at an investment strategy and then consider fees.
  • At the same time, fees should not be the overriding concern.
  • High fee investment strategies are worthwhile if they deliver sufficient return and lower risk.
  • Investors must analyse fees in the overall context of managing their portfolios appropriately.

A framework for Changing the discussion on fees

Despite it often framed this way, the debate on fees is not black versus white.

From this respective, understanding the disaggregation of investment returns can help in broaden the debate on fees and also help determine the appropriateness of fees being paid. 

From a broad view, investment returns can be disaggregated in to the following three parts:

  1. Market beta. Think equity market exposures to the NZX50 or S&P 500 indices (New Zealand and America equity market exposures respectively).  Market Index funds provide market beta returns i.e. they track the returns of the market e.g. S&P 500 and NZX50. Beta is cheap, as low as 0.01% for large institutional investors.
  • Factor betas and Alternative hedge fund beta exposures.  Of the sources of investment returns these are a little more ambiguous and contentious than the others.  This mainly arises from use of terminology and the number of investable factors that are rewarding.  My take is as follows, Factor betas and Alternative hedge fund beta fit between market betas (above) and alpha (explained below).
    • Factor Beta exposures.  These are the factor exposures for which I think there are a limited number.  The common factors include value, momentum, low volatility, size, quality/profitability, carry.  They are often referred to as Smart beta.
    • Alternative hedge fund betas.  Many hedge fund returns are sourced from well understood investment strategies.  Therefore, a large proportion of hedge fund returns can be explained by common hedge fund risk exposures, also known as hedge fund beta or alternative risk premia or risk premia.  Systematic, or rule based, investment strategies can be developed to capture a large portion of hedge fund returns that can be attributed to a hedge fund strategy (risk premia) e.g. long/short equity, managed futures, global macro, and arbitrage hedge fund strategies.  The alternative hedge fund betas do not capture the full hedge fund returns as a portion can be attributed to manager skill, which is not beta and more easily accessible, it is alpha.
  • Alpha is what is left after all the betas.  It is manager skill.  Alpha is a risk adjusted measure. In this regard, a manager outperforming an index is not necessarily generating alpha.  The manager may have taken more risk than the index to generate the excess returns and/or they may have an exposure to one of the factor betas or hedge fund betas which could have been captured more cheaply to generate the excess return.  In short, what is often claimed as alpha is often explained by a factor or alternative hedge fund beta outlined above.  Albeit, there are some managers than can deliver true alpha.  Nevertheless, it is rare.

These broad sources of return are captured in the diagram below, provided in a hedge fund industry study produced by the AIMA (Alternative Investment Management Association).

The disaggregation of return framework is useful for a couple of important investment considerations.  We can use this framework to determine:

  1. Appropriateness of the fees paid. Obviously for market beta low fees are paid e.g. index fund fees.  Fees increase for the factor betas and then again for the alternative hedge fund betas.  Lastly, higher fees are paid to obtain alpha, which is the hardest to produce.
  2. If a manager is adding value – this was touched on above. Can a manager’s outperformance, “alpha”, be explained by “beta” exposures, or is it truly unique and can be put down to manager skill.

The consideration of this framework is consistent with the observations from the article above covering the 5 myths of Investment Management Fees.

Lastly, personally I think a well-diversified portfolio would include an exposure to all of the return sources outlined above, at the very least.

Many institutional investors understand that true portfolio diversification does not come from investing in many different asset classes but comes from investing in different risk factors. See More Asset Classes Does not Equal More Diversification.

From this perspective, the objective is to implement a portfolio with exposures to a broad set of different return and risk outcomes.

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For Outsourced Chief Investment Officer (OCIO) and investment consulting services please see here.

 

Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.

Active Engagement, Stewardship, and Taxonomy key Responsible Investing Issues

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Active engagement and stewardship have leapt in importance as a way for asset managers to drive sustainable change. This is a key conclusion of a study undertaken by Schroders in 2020. 

Schroders conclude “The results suggest that engagement and voting are now increasingly being viewed as an important aspect of achieving change, rather than simply divesting.”

Their study found that nearly 60% of “institutions said active company engagement and stewardship was a key approach to integrating sustainability.” This is a significant rise on 38% a year ago.

The survey also highlighted:

  • ESG Integration into the investment process and positive screening (focusing on the best in class companies) are the top two important drivers for asset managers to drive sustainable change;
  • Positive screening has also grown sharply in importance, from 44% of survey respondence to 61%; and
  • Conversely Negative Screening has fallen in importance (53% to 36%).
Source: Schroders

Investors noted signs of successful engagement included:

  • Transparent reporting;
  • Tangible outcomes; and
  • Consistently voting against companies in order to drive change.

Greenwashing, poor data, and increased Regulation

Greenwashing, as described by Schroders “‘a lack of clear, agreed sustainable investment definitions’” was seen as the most significant obstacle to investor’s sustainable investment intentions.  60% of those surveyed found green-washing as one of the most significant obstacles impeding their sustainable investing intentions.

The lack of transparency and reported data was also raised as an issue restricting the ability to invest sustainably.

Both measures increased in importance on last year, while performance concerns continued to decline.  45% of investors cited performance as concern in relation to investing sustainably.

Source: Schroders

These results were recently picked up in an Alternative Investment Management Association (AIMA) article, which focused on the increased integration of ESG into Hedge Fund’s investment processes.  Hedge funds start integrating ESG (aima.org).

In relation to green-washing, AIMA notes that regulators are also concerned about green-washing, noting the introduction of the Sustainable Finance Disclosure Regulation (SFDR) rule in the European Union.  The SFDR came into effect on March 10 of this year, aimed at ensuring financial firms such as fund managers, insurers, and banks providing financial products and services comprehensively disclose just how committed to sustainability they truly are.

The AIMA notes “The EU rules will also create a taxonomy as regulators look to facilitate greater consistency in terms of what can be classified as being a sustainable economic activity.”

The AIMA also noted more global investors are now prioritising ESG, and it is something which hedge funds need to respond to.  Although they felt the US was behind the rest of the world, particularly Europe (I would add Australian and New Zealand as well), this was changing.

By way of example, the AIMA article highlighted “that several high profile US institutions – including the likes of CALPERS and Wespath – have signed up to the UN-backed Net Zero Asset Owner Alliance, a consortium comprised of 30 of the world’s largest investors – all of whom have committed to reduce carbon emissions linked to the companies they invest in by 29% within the next four years.”

Failure to transition towards net zero is widely seen as a important risk management issue for companies. Arguably, companies failing to adapt or transition towards net zero will see their businesses and valuations suffer.

Lastly, AIMA highlighted the concerns over the quality of ESG data being disclosed by managers to their investors.

“One of the primary problems is that there are no harmonised ESG data standards. Instead, there are many different ESG standards and protocols, all of which have their own characteristics. With different managers subscribing to different ESG standards, the reports they produce for clients are often inconsistent and even contradictory. Similarly, ratings agencies will often have their own bespoke methods of collecting data from companies they are scoring. ……… Without a common data collection methodology, the ratings agencies’ scoring processes will be fragmented.”

Key Engagement Issues

The survey by Schroders found environmental issues remained the most important engagement issue for investors.

In total, 68% of investors globally said they expected investing sustainably to grow in importance over the next five years.

“Driving this focus were institutions looking to align their investments with their own corporate values, responding to regulatory and industry pressure, and, positively, the belief that investing sustainably can drive higher returns and lower risk.”

The Schroder study included 650 institutional investors encompassing $25.9 trillion in assets.

Please read my Disclosure Statement

For Outsourced Chief Investment Officer (OCIO) and investment consulting services please see here.

Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.