matakite capital - kiwisaver default review submission

7/29/2019 Matakite Capital - KiwiSaver Default Review Submission

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ReviewofKiwiSaverDefaultProviderArrangements

SubmissionofMatakiteCapitalinresponsetotheMinistryofBusiness,Innovation&Employments

November2012DiscussionDocumenttitledReviewofKiwiSaverDefaultProviderArrangements.

SubmittedelectronicallytotheBusinessLawTeamat [email protected] ,24December,2012

Introduction

MatakiteCapitalwasformedtoofferNewZealandinvestorsaccesstoglobalopportunitiesinprivate

equityandotherilliquidassetclasses.AtMatakite,webelievethatappropriateallocationstothese

kindsofinvestmentsareacrucialpartofanyportfolio,includingKiwiSaveraccounts.KiwiSaveras

currentlystructureddoesnotpermitthesekindsofinvestmentsandwehavemadesubmissionsto

Governmentoutliningwhyandhowthisshouldbefixed1.

GeneralComment

We support fully the broad purposes of the KiwiSaver scheme and we think it has achieved

significant success despite the negative predictions of its detractors, and beyond even the

expectationsofitssupporters.

Nonethelesswe believethat KiwiSaver (including thedefaultprovider arrangements) will benefit

from continuous active review and should be significantly improved over time to deliver betteroutcomes for New Zealand, in keeping with the schemes original purpose. We view the New

Zealand environment as being relatively unique, requiring policy makers to go beyond simply

followingforeignprecedentandinsteadtodevelopaninnovativeschemedesignthatoptimizesthe

capital invested in the KiwiSaver structure for the greatest long-term benefit for the greatest

numberofNewZealanders.

NewZealandcannotaffordtosquanderacapitalpoolthatalreadyexceeds$13,000Mandwhichwill

continuetogrowsignificantlyyear-on-year(currentinflowsareinexcessof$1,000M/year).Weare

therefore encouraged by this review albeit limited to default provider arrangements, because it

showsacommitmenttoimprovingschemeperformanceanditenablesbroaderdiscussionofissuesthathaveimpactacrosstheentireKiwiSaverscheme.Wehopethatthisreviewresultsinchangesto

theFinancialMarketsConductBill,whichsitsinfrontoftheHousetoday.

1CreatingWorldClassPortfoliosforKiwiSavers:EnhancingKiwiSavertoallowschememanagerstoinvestin

linewithglobalbestpracticesforlong-terminvestors-SubmissiontotheCommerceCommitteeRe:FinancialMarketsConductBill(GovernmentBill342-1) http://bit.ly/UWm2Pe


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SpecificComments

WeproposetofollowtheformatoftheDiscussionDocumentandrespondonlytothenumbered

questionsonwhichwehavespecificknowledge,experienceorpointsofview.

7. Are there other issues around risk and investment strategies that we should be taking into

consideration?

Webelievediversificationshouldbetakenintoaccountandspecifically,diversificationacrossasset

classes.AsNewZealandHeraldcommentatorandinvestmentmanagerBrianGaynornotes,There

aretwomaininvestmentdecisions,assetallocationandindividualsecurityselection.Theformeris

byfar themostimportant, althoughmost investorsfocuson thelatter.AmericanacademicGary

Brinsonpopularizedtheimportanceofassetallocationbyclassinhis1986FinancialAnalystsJournal

articleDeterminantsofPortfolioPerformance.

The status quo KiwiSaver default regime effectively mandates a conservative approach that

precludesdiversificationacrossassetclasses.Thereforeitrobsdefaultinvestorsofthebenefitsof

diversification,namelymoreeffectiveriskmanagement,andthepotentialenhancementofreturns.

14. Do you have other suggestions for an investment approach? For example, what about a

balancedinvestmentstrategywithaswitchtoconservative/cash5-10yearsoutfromNZSuper

eligibility?

We think portfolios should always be balanced and that requires access to all available asset

classes. In fact, almost all longer-term investment approaches - other than pure cash - should

involvesomeinvestmentinwhatwehavecalledIlliquidAssets2.EvenwhenaKiwiSaveraccount

holderisapproaching65thereisstillroomforlongertermthinking,becausethefundsmightbe

used over the next 10+ years. The idea that at 65suddenly yourportfolio should bepurecash

ignoresmodernstatisticsshowingincreasesinlifeexpectancybeyond75.

2Whatwerefertoasilliquidassetsgobymanydifferentnames.However,forourpurpose,illiquidassetsare

investments that typically have a number (but notnecessarilyall) of the following characteristics: chunky,

opaque,indefinite,cashflownegativeearly.Formoreinformation,readExhibit2,p.17ofourpaperCreating

WorldClassPortfoliosforKiwiSavers http://bit.ly/UWm2Pe


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20.Inyourview,doyouconsidertherationalelistedabovetobeaccurate?Ifnot,whynot?

Wedontconsidertherationaletobeaccurateorvalid,becauseitfailstounderstandthatthereisa

problemwithKiwiSaverasitrelatestoinvestmentsinIlliquidAssets.Asdetailedinoursubmission3,

KiwiSavercannotbeinvestedinalternative(illiquid)assetswithoutprovisionforsuspendinginternal

andexternal liquidity requirements. Inourview, most KiwiSaver managersdontunderstand this

problem.Also,wedontbelievethattheKiwiSavermanagercommunityhasmuchknowledgeor

experience working with this asset class. KiwiSaver managers function mainly as mutual fund

managers:theylikeliquidassetswithhightradingvolumesanddailyquotedpricesthattheycansee

onascreen.Theyhavenoexperiencepickingalternativeassetsand/ormanagersandtheydont

knowhowtodealwiththevaluationandotherissuessurroundingtheassetclassandtheyhaveno

incentivetoexploreopportunitiesintheassetclass.

KiwiSaver managersare fondof saying thecost of these asset classes isprohibitive, yetnone of

these managershas donereal work on comparing net returns of alternatives to public markets.

Further,the2to3percentallocationquoteddoesnotreflectbestpractice(refertoourpaper).A

balancedallocation(say15 25%)on$13Bprovidesplentyofscaleandopportunitytoexplore

theseassetclassesincost-effectiveways.Butunlessthelegislationisfixedtoprovideawaytodo

that,thissectorandtheprivate,productiveNewZealandeconomy-willcontinuetobeoutside

thescopeofKiwiSaver.

With regard toParagraph 62, wenote that there areexamples of successful retailinvestmentin

illiquid asset classes in New Zealand, including private equity (Pohutukawa Fund, by Craigs

InvestmentPartnersandDirectCapital),forestry(Greenfields,RogerDickieForestPartnerships,etc.)

andothers.WebelievetheproductmixofferedbyKiwiSavermanagersisdirectlycorrelatedtotheir

expertise,i.e.managersthatdealonlyin listedsecuritiesonlyeverofferproductsbasedonlisted

securities.

21. Doyouhaveanysuggestionsorproposalsas tohowtheasset classesmightbemade more

attractiveforKiwiSaverinvestment?

TheKiwiSaverschemedesignitselfcantmaketheassetclassesmoreattractive.ButifKiwiSaveris

fixedtoenabletheseassetclassestobecomepartoftheKiwiSaverportfolio,thenmanagerswillfind

waystomakethemattractive.Iftheseassetclassescantstandaloneonarisk-adjustednetreturn

basis,thenKiwiSaverfunds(andKiwiSavers)shouldntbeinvestinginthem.Theschemedesignjust

needs tomake the asset class accessible, so that the managersof that asset class will focuson

KiwiSaverasasourceoffundsandworktodeliverinvestmentproductsthatsatisfyKiwiSaverneeds.

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CreatingWorldClassPortfoliosforKiwiSavers:EnhancingKiwiSavertoallowschememanagerstoinvestinlinewithglobalbestpracticesforlong-terminvestors-SubmissiontotheCommerceCommitteeRe:Financial

MarketsConductBill(GovernmentBill342-1) http://bit.ly/UWm2Pe


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25.Are there other possible approaches for reducing fees, for example a risk-sharing approach

wherebyfeesarenotchargedonnegativeperformancerelativetomarketperformance?Please

detailanyproposalsyoumighthave.

Theemphasisshouldntbeonreducingfees perse.Theemphasisshouldbeonincreasingreturns

netoffees.NetreturniswhatmatterstotheKiwiSaver:howmucharetheyleftwithattheendofthe term? Weare in favour of high-quality, consistent reporting thatwill allowcomparisonsof

performance across all asset classes over the long term. Managers should be precluded from

reporting any performance that does not represent a net realized return to the individual

accountholder. Reporting of short term changes in gross account value do not provide a

meaningfulbasisforcomparingthelongtermperformanceofanaccountormanager.

24December,2012

MatakiteCapital

AdrianvanSchie,PhilVeal,PoojithaPreena

matakite capital - kiwisaver default review submission

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