New research paper shows scheme's success triggers investment capacity issues
AUCKLAND, 8 SEPTEMBER 2016 — New Zealand needs more equity managers and company listings in order to cope with the remarkable flow of KiwiSaver assets pouring into the local market, according to global asset manager Russell Investments. KiwiSaver assets hit NZ$35.6 billion in June 2016 and that figure is estimated to double by 2020.
In its recently released research paper, ‘New Zealand equities and the KiwiSaver king tide’, Russell Investments points out that the rapid growth of KiwiSaver has begun to put pressure on active New Zealand equity managers. KiwiSaver schemes invest a proportion of their assets in NZ equities, which has seen an influx of funds into the domestic market, though the market capitalisation has remained relatively flat.
“KiwiSaver inflows are outstripping market growth, which is creating capacity issues for active investors,” said Sam Faulkner, Investment Analyst – New Zealand at Russell Investments. “With a significant and growing volume of funds to invest, managers face capacity constraints to implement an active strategy for New Zealand equities.”
He added that the New Zealand market is particularly prone to capacity constraints since it features a relatively small number of stocks and a limited number of local active equity managers.
“Investment manager capacity is an important consideration,” Faulkner said. “Having too many assets under management can impact an active manager’s ability to add value above the benchmark, which in turn could hinder outcomes for New Zealand investors.”
The Russell Investments paper estimates that the average New Zealand active equity manager believes it can successfully manage around 1.7% of the total local market. In contrast, in order to avoid undue negative impact on performance, many Australian broad market equity managers limit their assets under management to 0.75% to 1.0% of the market.
“Several active NZ equity managers are already at or close to capacity, and the increasing influx of KiwiSaver money will struggle to find a home in the domestic market,” Faulkner said. “We’re sharing our research findings as we believe the issue needs to be addressed if domestic equities are to play a role in the ongoing, long-term success of KiwiSaver.”
Russell Investments’ research analysts suggest four possible solutions:
- The domestic equity market needs to grow at a faster rate with more listings.
- The market needs more active equity managers.
- KiwiSaver providers may need to think about reducing their allocation to New Zealand equities.
- Investors may need to consider a move to a passive or semi-passive approach for their domestic equities allocation.
For more information on this issue, please see the report, here.
About Russell Investments
Russell Investments, a global asset manager, is one of only a few firms that offers actively managed multi-asset portfolios and services that include advice, investments and implementation. Russell Investments stands with institutional investors, financial advisers and individuals working with their advisers—using the firm’s core capabilities that extend across capital market insights, manager research, asset allocation, portfolio implementation and factor exposures—to help each achieve their desired investment outcomes.
Russell Investments has more than NZD$342 billion in assets under management (as of 6/31/2016) and works with more than 2,500 institutional clients, independent distribution partners and individual investors globally. As a consultant to some of the largest pools of capital in the world, Russell Investments has more than $2.3 trillion in assets under advisement (as of 12/31/2015). The firm has four decades of experience researching and selecting investment managers and meets annually with more than 2,200 managers around the world. Russell Investments also traded more than $1.7 trillion in 2015 through its implementation services business.
Headquartered in Seattle, Washington, Russell Investments operates globally, including through its offices in Seattle, New York, London, Paris, Amsterdam, Milan, Dubai, Sydney, Melbourne, Auckland, Seoul, Tokyo, Shanghai, Beijing, Toronto, Chicago, Milwaukee and Edinburgh. For more information about how Russell Investments helps to improve financial security for people, visit russellinvestments.com/nz
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First used: September 2016