An Alternative Future for Kiwisaver Funds

I have blog previously on the benefits of Alternative investments for a robust portfolio.

They would benefit Target Date Funds (Life Cycle Funds) and they have benefited Endowments and foundations for many years.

As the Funds Under Management (FUM) grows within Kiwisaver there will be an increasing allocation to Alternative investments. This will include the likes of unlisted assets (Private equity, direct property, and direct infrastructure), hedged funds, and liquid alternative strategies such as Alternative Risk Premia strategies.


A recent paper by Preqin, Preqin-Future-of-Alternatives-Report-October-2018, assesses the likely size, shape and make-up of the global alternative assets industry in 2023, the emphasis being on private capital and hedge funds.

Preqin are specialist global researchers of the Alternative investment universe and provide a reliable source of data and insights into alternative assets professionals around the world.


Needless to say, Alternatives are going to make up a large share of investment assets in the future.

Preqin’s estimates are staggering:

  • By 2023 Preqin estimate that global assets under management of the Alternatives industry will be $14tn (+59% vs. 2017);
  • There will be 34,000 fund management firms active globally (+21% vs. 2018).


This is an issue from the perspective of capacity and ability to deliver superior returns.  Therefore, manager selection will be critical.


Preqin outlined the drivers of future growth as the following:

  • Alternatives’ track record and enduring ability to deliver superior risk-adjusted returns to its investors, Investors need to access alternative sources of return, and risk, such as private capital.
  • They note the steady decline in the number of listed stocks, as private capital is increasingly able to fund businesses through more of their lifecycle;
  • A similar theme is playing out in the debt markets, there are increasing opportunities in private debt as traditional lenders have exited the market; and
  • The emerging markets are seen as a high growth area.


According to Preqin the following factors are also likely to drive growth:

  • Technology (especially blockchain) will facilitate private networks and help investors and fund managers transact and monitor their portfolios, and reduce costs vs public markets.
  • Control and ESG: investors increasingly want more control and influence over their investments, and the ability to add value; private capital provides this.
  • Emerging markets: the Chinese venture capital industry already matches that of the US in size; further emerging markets growth will be a ‘double whammy’ of GDP growth + higher penetration of alternative assets.
  • Private individuals: the ‘elephant in the room’, as the mass affluent around the world would like to increase their investment in private capital if only the structures and vehicles (and regulation) permitted; technology will help.


The Preqin report covers many other topics and interviews in relation to the Alternative sector.


Happy investing.


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


Please see my Disclosure Statement

What is Responsible Investing?

There was a good article recently in GoodReturns on Responsible Investing (RI).


If I was to be critical, I would disagree with the comment at the beginning of the article that starting with exclusions (or negative screening) is a good first step. (As the article explains exclusions or negative screening involves removing companies in a portfolio that are in bad/sin/egregious industries, for example, controversial weapons and tobacco.)

I would argue, that a good first step is to have a Responsible Investing Policy. And that this Policy includes incorporating Environmental, Social, and Governance (ESG) considerations into the investment process. The Policy may well lead to exclusions, or may even include excluding certain sectors such as tobacco.

A good RI policy would also include a level of engagement with underlying companies and the investment management industry on RI issues.

The consideration of ESG factors will broaden the understanding of a portfolio’s and security’s risks, which involves understanding predominately non-financial risks which may very well have a financial impact.

Nevertheless, having a ESG focus does not necessarily lead to exclusions, it may do, it may also temper the size of the allocation to a stock or sector.  As a better understanding of the risks can be incorporated into the investment decision making process. Likewise, the RI approach could result in a combination of exclusions and sizing of portfolio allocations.

The ongoing RI research may lead to a blanket exclusion of sectors, which would be reflected in the RI Policy. I’d suggest this is the maturing of the RI approach over time, not the beginning, nor the beginning of the end!

I’d also suggest as the level of exclusions increases this is more ethical or social responsible investing, which is a subset of Responsible Investing i.e. exclusions is not what “Responsible Investing” is all about. RI is a very broad church.

Lastly, I would also argue that ESG is already mainstream in many parts of the world, the Responsible Investment Association of Australasia (RIAA) was set up in 2002 and many institutional investors have been embracing ESG for over a decade, as have broker reports included ESG/sustainability scores on companies.

Albeit there is confusion on just what is RI. The comments to GoodReturns article reflect this.


There is also a growing body of evidence, which has been around for some time, that incorporating ESG considerations into the investment process leads to better-informed investment decisions.  As noted above, RI is a broad church and there are varying degrees of implementing RI.

Therefore, the criticism of RI around the fear of missing out and underperformance due to negative screens needs to be taken with a level of perspective.  Not all RI approaches are a like, and therefore impacts on likely performance outcomes can vary.

One should not be quick to criticise RI giving the variation in approaches.

The evidence is not clear cut.  The higher the level of negative screens and constraints on a portfolio the more likely it is to underperform.

Nevertheless, an appropriate RI approach can enhance returns, and certainly reduce portfolio risk.


Another criticism of RI is around fees. Fees just are not an issue in implementing a successful RI approach.

The NZ Super Fund is an example, they do have an appropriate fee budget to manage the Fund, which does not exclude them investing into higher fee investment strategies, e.g. hedge Fund strategies and Private Equity, yet they run a global best practice Responsible Investing approach. It would appear you can have both, appropriate fee level and an industry best practice RI approach.  They certainly believe this will result in better investment outcomes over the longer term and will have more to pay out to the Government from the Fund in the future.

To date they have a good performance record and would not appear to have been negatively impacted from their RI approach, which includes negative screens.


The research on exclusions is mixed and varied. Comments to the GoodReturn’s article refer to Cliff Asness from AQR and his blog post on ESG. I have a lot of respect for Asness and read his blog.

My understanding on his position is that negative screening and divesting bad stocks is “actually at odds with the very point of ESG investing”.

Asness argues, if removing “bad/sin” stocks from a portfolio does help, it is an action that should be taken anyway for the sake of higher returns.

Nevertheless, IMO, an ESG framework helps identify those stocks that would fail or underperform due to ESG factors, thus the value of ESG focussed investment approach.

Please note AQR has an ESG policy.

Asness is not arguing against ESG investing, he is arguing against placing constraints on a portfolio, in this context of negative screens.  Too many constraints and a portfolio will underperform in his opinion, not surprising given he is an active manager!

Interesting, Asness contends that the desired outcome from negative screening will lower the level of investment returns achieved by the sin stocks given their cost of capital will rise. Thus the “Virtuous” negative screening investor will achieve their desired outcome: less investment within the sin/bad sectors by those companies. Asness argues that the Virtuous investor will achieve this but incur lower levels of returns themselves. The price of being Virtuous.

Not to pick an argument with Asness, as I’d surely lose, those companies that focus on managing ESG risks may have a lower cost of capital relative to their industry peers, and therefore make higher returns on investments. Thus positive ESG screening results in higher returns, the additional benefits of incorporating ESG considerations into the investment process. I’d certainly see this playing out in the resource sector.


Interestingly the recently released RIAA annual benchmark report noted “a lack of awareness and advice among retail investors…., and… Financial advisers…. (but the) truth is in some pockets of the advisor community, they’ve been slow to understand what this is all about and often somewhat dismissive about clients’ interests in ethical and responsible investing. There are a lot of deeply entrenched myths that still pervade that space, ……………… there’s still a perception that there’s a performance cost, this latest research shows responsible investment funds have performed consistently over time. ”

RIAA saw “ESG integration as having a positive impact on performance and the historical question marks that hung over the relative performance of responsible investment funds were starting to lift.’

Therefore, you can still have an ESG approach without negative screening.  Of course, you can also have varying levels of negative screening and maintain an ESG approach.

All up though, there is growing body of evidence that incorporating ESG considerations into the investment process leads to better-informed investment decisions.  The performance impact from negative screening is more contentious and motives to implement negative screens more varied.


I argue strongly, incorporating ESG into the investment process and maintaining a robust and evolving RI policy will result in better investment outcomes over time.



Happy investing.


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


Please see my Disclosure Statement

Shocked to see the State of the Asset Management industry

“The asset management industry is at the crossroads of enjoying rising markets and growing pools of capital to manage, and navigating significant disruption, changes and pressures from all sides. Taking the right path and making the right choices to adapt, evolve and transform will distinguish winners from losers.”

That is the thoughts of KPMG following the publication of report in to State of the Asset Management Industry

KPMG have identified three game changes that they believe are “fundamentally changing the landscape for this industry. How the asset and wealth management firms respond to these will likely determine their success in the next 5 -10 years.”

KPMG identify three main Game Changers:

  1. ETFs
  2. China
  3. Responsible Investing


Responsible Investing

The focus on Responsible Investing (RI) was interesting and a little concerning.

KMPG notes the global asset management has a lower level of trust than the banks and insurers. This is a big issue for the industry.

Therefore KMPG calls for the industry to “truly embrace responsible investment and embed Environmental, Social and Governance criteria into the investment process”

KMPG see this as an important part in restoring trust within the industry. They encourage the industry to be much more wholehearted and convincing in embracing responsible investment and embedding ESG factors into the investment process.”

“The next generation of retail, pension fund and institutional investors want to see their capital being used to create an impact and contribute to a better world”.


Of course Responsible Investment and ESG are not new. The Responsible Investment Association of Australia (RIAA) was set up in 2002. Australia has likely lead the rest of the world in this respect.

Therefore, a key issue is that Asset Managers, and Asset Owners, can clearly demonstrate to clients and regulators they are doing what they say they are doing, a point noted by KPMG. A more convincing approach is required.


The other two changes are well understood, ETFs and China.


KPMG note:

  • Exchange Traded Fund (ETF) assets are already bigger than hedge funds and index tracker funds, and are expected to overtake mutual funds within the next 10 years. Currently the global ETF market is at US$5 trillion and is expected to more than double in the next 5 years.
  • There are rapidly growing markets where ETFs are the vehicle of choice. They fit well with digital technology used by Roboadvisers. They work well as efficient building blocks for asset allocation solutions and model portfolios in the wealth management industry and in the increasingly important self-directed market.
  • Wealth Managers are increasing their use of ETFs. Areas of growth include smart beta, while active ETFs are increasing in popularity

KMPG sum it up: “The traditional asset management industry is at an inflection point. Regulatory scrutiny around value for money and transparency, disruptive D2C technology and new investor preferences, necessitate that firms adapt and innovate if they are to flourish in the new order.



Pretty simple, “KPMG expects the industry to grow at a double digit rate, year on year, over the next 15 years.”

“In 1998, six Fund Management Companies (FMCs) managed US$1.27 billion, while today 132 firms manage US$2.0 trillion of funds. KPMG forecast USD$5.6 trillion of assets under management in China by 2025, which would make it the second-largest asset management market in the world.”


It is certainly a challenging environment for which industry leaders need to be aware.


Happy investing.


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


Please see my Disclosure Statement

Is Sector exclusion Lazy? Responsible Investing

I have some sympathy with the view that excluding sectors is lazy.

Doing so alone does not make one a Responsible Investor (RI), more an ethical investor.

Nevertheless, excluding sectors (negative screening) could be part of an Investor’s RI approach.


This post is in response to a recent GoodReturns article, Sector exclusions lazy CIO says.


In my mind, RI can be thought of as a continuum, at one end is do nothing, non RI, and at the other end is ethical investing, which would include a number of exclusions depending on ethical positions.  In between are different shades of RI.  RI is a broad church.

For most institutional Investor’s their RI approach centres around the United Nations supported Principles of Responsible Investing (PRI).  PRI has six principles, see below.


Whatever the “Responsible Investing” approach it should be based on a documented policy, preferably approved by the Board.  The policy would provide RI philosophy, approach, and guidelines e.g. the exclusion of sectors based on a investment research position or set of values.

I think the approach to RI should be addressing the PRI’s six principles.


With regards to impact on performance.  I’d see RI as having the ability to add value, certainly improve risk-adjusted returns.  There is increasingly more evidence suggesting this, particularly at the stock selection level for equities and bonds.

Likewise, heading down the road of excluding a large number of sectors will increase variability of returns relative to broad market indices (that is the math).  Nevertheless, I’d argue this is ethical investing, not RI.  Perhaps the two will come closer together over time.  That will need a growing consensus of what sectors are acceptable and what are not i.e. tobacco has wide acceptance as being excluded currently.


RI to me is much more about risk management.  Environment, Social, and Governance (ESG) factors can impact on the long term financial outcomes of a company and a broader portfolio.  Well researched ESG positions will improve risk-adjusted performance.  Such a research driven approach may result in the exclusion of some sectors.  It may also result in making investment decisions a non-RI approach would not consider e.g. impact investing or reducing a portfolio’s carbon exposure given changing government regulations and taxes.  I have a preference that the ESG approach focuses more on a portfolio’s financial impacts, rather than ethics.  Albeit, RI should be set within a sound philosophy and values framework.

The ESG factors should be integrated into the investment process, through selection and monitoring of investments.

Therefore, the consideration of ESG factors will help improve long term risk-adjusted returns, provide better insights into the risk of companies and potentially wider portfolio risk exposures, not just listed equities but unlisted assets such as infrastructure and property.  ESG assists in considering portfolio risks more broadly.  RI can make for more robust portfolios.

RI also includes engagement, with companies and the industry.  It is proactive, e.g. proxy voting and engagement with companies.  RI is a lot more than just excluding an equity market sector.  From this perspective, an investment manager can do more good through engagement than just excluded particular sectors.  They can make a conscious and research based decision not to invest in a company with the consideration of ESG factors.

RI is consistent with being a long term investor and stewardship.  In this regard, RI is as much about sustainable investing.

And that highlights a problem, there is so much terminology in our industry, particularly within this space.  This leads to inconsistency in meaning across the industry, which is reflected within the media e.g. Ethical Investing and Social Responsible Investing are often described as “RI”, which is not really true, at best it is at the far end of the RI continuum and based more on values than financial impacts, it is a subset of RI at best.


As an aside, one of the best books I have read on sustainable investing is, Sustainable Investing for Institutional Investors, by Mirjam Staub-Bisang.  I am interviewed in one of the chapters (no I don’t get any royalties) along with Amanda McCluskey, chpt 16.  Both are wonderful people.



Happy investing.



Please see my Disclosure Statement


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



PRI Principles:

Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.

Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.

Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.

Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.

Principle 5: We will work together to enhance our effectiveness in implementing the Principles.

Principle 6: We will each report on our activities and progress towards implementing the Principles.