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Personal finance editor talks to Grosvenor Financial Service's David Beattie about their investment philosophy and why currency hedging holds a high place.

Investing
Personal finance editor talks to Grosvenor Financial Service's David Beattie about their investment philosophy and why currency hedging holds a high place.

Snapshot: Between its nine KiwiSaver funds Grosvenor Financial Services manages NZ$180 million and has about 28,000 members.

Q) What's Grosvenors' investment philosophy?

A) There's a lot of debate worldwide around what's an appropriate investment strategy: should it be predominantly invested in passive index managed funds or going the more active route?. We decided some time ago that there wasn't a lot of merit in taking a fundamentalist approach to either of those two. We think each of those styles has merit and so our core philosophy is to have around a 50/50 mix of the two approaches.

We capture the markets through good efficient index type funds and around that we'll add some very active satellite strategies to capture some really good value out there. There are some excellent managers operating in that space. We have a select few managers as part of our suite including Rothschild out of  Switzerland. They help us to put together a tight highly concentrated portfolio of 15 to 20 stocks invested around the world in some of the core, key, top down themes we believe are important going forward and which we believe will add considerable value over and above what a market index will do.

Q) What themes are you hot on?

A) If you look ahead 15 to 20 years there are some pretty clear themes that are going to drive a lot of investment opportunities going forward, particularly the ageing population which in itself brings issues centred around health care. So quite a number of our stocks are focused on health care.Also with the growing population you have demand for core commodities: food, water, alternative energy will be critical going forward. One theme we've discussed with Rothschilds is the growing change of spending patterns among Asians, particularly China with a growing middle class. That's generating demand for high quality goods and services. 

Q) What's your position on fees?

A) It's a delicate issue and one which will cause ongoing debate in KiwiSaver.  From our perspective we think it's far more important to focus on what fund managers can generate, in terms of returns after fees. If they're doing a good job in that respect, I don't think the fee issue should be as focussed as it is. There are a number of very good managers who are household names in New Zealand who charge close to 1.5% who are not included in any KiwiSaver funds simply because of the 1.5%. And yet after that fee, these managers have generated double digit returns for the last 10 years which for my measure is more significant. I hope over time that we get a bit more perspective on the issue of fees and the importance of overall determining factors for choosing a provider. It's taking up too much of the headlines at the moment.

Q)  You have a team of six at Grosvenor that manages the New Zealand and Australian equities within your KiwiSaver funds. What's behind that decision?

A) It's done that way because we want to make sure we're consistent with global themes. The danger of using off the shelf fund manager products is that you can't tailor them to be consistent with what is happening in other parts of your portfolio and one of the core planks of our philosophy is we want to make sure every component of the portfolio is working well with every other piece of the portfolio. For example, we believe financial stocks are best captured in Australia so we emphasise financial stocks in Australia. Our mandate with Rothschild is we don't want global financial stocks because we have Australian-based financial stocks. We tailor things accordingly. We buy a lot of research on individual companies themselves, then after having a client focus, we select the right companies to represent the sectors that we believe are the one's most consistent with overall global themes?

Q) What's your currency hedging strategy?

A) We're very active in terms of the currency strategy we apply. At any point in time our international shares can be between 20-80% hedged. We'd normally sit around 50% if we didn't have a strong view either way.

We have found that in looking at KiwiSaver manager space, most managers are following a 50% strategy but aren't moving much around that. We believe that from a holistic viewpoint the currency strategy is the single most important determinant of long term wealth aspirations particularly as you approach retirement because of the level of exposure we have in New Zealand to currency related fluctuations in terms of our standard of living.

If you take a high level approach to risk management, then a New  Zealander should have most, if  not all of their international investments unhedged because we know that if some local disaster hit our economy, for example foot and mouth disease, the New Zealand  dollar would drop 30-40% over night. If you have a whole lot of international investments that are fully hedged back to New Zealand dollars, they're not going to get the benefit of the fall in the currency and yet as the standard of living is collapsing around our ears, the only thing you could potentially say would help to offset some of that is to have some offshore investments unhedged.

But from time to time the NZ dollar will go up and you just have to live with the fact that it's going up. And that will affect the value of the portfolio while it's happening. That's been a feature for our funds in the past 12 months but since inception the volatility associated with having a relative low level of  hedging has played an important part in smoothing out the risk factors that would otherwise have effected the portfolio. We're going to stick with that philosophy. We think New Zealanders need more managers who are taking a more absolute return focus particularly given the risk of them losing significant portions of their capital.

Q) Does Grosvenor manage other funds?

A) We started off our lives 13 years ago looking after funds for financial advisers throughout New Zealand. So currently we have maybe NZ$500 million of funds in New Zealand that we're looking after on behalf of retail investors through financial planners. That's non superannuation. Then we look after A$750m in Australia through our subsidiary company listed on the ASX. Most of that is superannuation money where we've been looking after that sector for the better part of eight years.

When KiwiSaver was introduced in New Zealand, it took us about a minute to decide we wanted to be in that space. It is the market place in Australia. Superannuation money is it if you extrapolate trends in Australia to New Zealand forward, particularly with all the noise coming out of government and there is a reasonable amount of bi-partite agreement that is is going to be a soft-compulsion and ultimately a compulsory scheme. Contribution rates are only going to increase. I wouldn't be surprised to find that over the long-term (15 years) contribution rates will be approaching those of Australia where they're headed from 9% to 12%. We're really low at 2%.

Q) What advantage does KiwiSaver have over other investment vehicles?

A) I think there's two key strategic advantages relative to non-superannuation.  One of them is the effective lock-in; helping people to commit to something that they're not able to take the money out. It's one of the most significant ways to help people from overriding their own long-term investment potentials either through a change of mind or emotional reaction to what's going on in the market place.

The other things is fees. There's a lot of commentary about fees. The Green Party has suggested investors are losing half their returns to fee. Fees seem higher than they are because earnings have been low because of the global financial crisis. Those earning rates are not normal and if those rates continue to be generated then the whole country and world is buggered. But there's no way those returns are going to persist for the next 5-20 years.

If you look at a typical balanced fund we expect, based on all our assumptions a balanced fund should deliver 6.5% after tax. And fees are tax deductible within the funds and on average they're just under 1%, so  0.8% after tax works out to about 1/8th on average and that's really cheap. Non-KiwiSaver products are running at 2-3%.

Q) What distinguishes Grosvenor from others on the market?

A) From an overall product perspective, it’s the nature of the close relationship we have with financial advisers. In time, that’s going to be a hugely underestimated component of the superannuation landscape. You only have to look at Australia to see how critical superannuation advisers are when people are contributing 9% of salaries and average balances are $90,000. It’s a huge industry and people need advice. They need help.

The advisers we deal with take a holistic approach to clients' financial well being. They help them to work out how much they’re saving into the funds. They encourage them to save as much as they can. They split out long term from short-term and help them lock that part away and make sure they’re in the right type of investments. Help them migrate toward an appropriate post retirement status. We’ll continue to make sure advisers are an integral part of the whole service offering.

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