Capitalist
Information
Opinion
As I write under the pen name of ‘Capitalist’ (chosen because ‘Sex God’ seemed unlikely to result in anything being published) it is appropriate to discuss profit-making undertakings and issue a word of caution about something which has troubled me for a while.
When you invest money with a fund manager, whether it be with your Kiwisaver or perhaps a nest egg, you deposit into a managed fund (your bank offers this to investors), that fund’s manager takes your money and everybody else’s and puts together a portfolio of, say, 40 or 50 investments in different companies. When the share prices rise the fund manager may seek to cash in everyone’s chips and look for other investments; rinse and repeat.
The reasoning behind this sort of investment is that one year transport companies and toy manufacturers may be doing well, but medical supply and supermarket companies not so well; your fund manager buys shares in the first group of companies and stays clear of the latter. Next year transport companies run into trouble, so the fund manager sells their shares at a profit and perhaps the cruise industry has sold out bookings so he buys those shares instead.
In theory, this fairly straightforward activity can be done indefinitely, and the reason fund managers are able to generate a reasonable return for their investors in the 8% to 10% range is because of the constant “rinse and repeat” nature of it.
What troubles me is the latest fad for New Zealand investors to dive into (and a breathtaking amount of money has been invested; I was shocked when doing some research on the matter): is what are known as “Index Funds” or “Passive Funds”. This is where the fund manager (if you can even call them that) buy shares in every company listed on the entire market in proportion to their size.
For instance, if you invest in a S&P 500 index fund (i.e. the main US sharemarket) and, say, McDonald’s are 0.18% of the value of the entire market then 0.18% of the portfolio are McDonald’s shares. If Stanley Black & Decker are 0.11% of the market, then 0.11% of the portfolio are Stanley Black & Decker shares, and so on. The reasoning is that it takes out the guesswork for the fund manager as he just buys shares in predetermined percentages. Rather than “rinse and repeat”, it is more a case of “set and forget”.
Instead of making a sweeping statement, using words such as “plague” and “avoid” or “Bridgecorp” (and risk various people getting their knickers in a twist), I will ask you, dear reader, to consider what it is that Index Fund investors are expecting to occur and you can draw your own conclusions.
The US sharemarket has had an amazing run in recent years but it is currently being propped up by – literally – a handful of “tech giants”. You would be very surprised at the sheer number of major brand name companies whose shares are down 20% or 30% from a year ago. The bad and the good.
Not only that, but if you are wanting a return of, say, 10% (probably more!) from the index fund, because you are buying the entire market (rather than a subset of, say, 50 stocks as regular fund managers do), you require the entire US sharemarket to double every 7 years (if not sooner), without a break. Indefinitely. Not sure I would bet my KiwiSaver money on that occurring.
This article is general in nature and should not be construed as any financial or investment advice. To obtain guidance for your specific situation, please seek independent financial advice.
