The KiwiSaver Conundrum: Why Active Managers Are Struggling to Keep Up
There’s a quiet storm brewing in New Zealand’s investment landscape, and it’s centered around KiwiSaver—the country’s flagship retirement savings scheme. Big-name fund managers, once hailed as the architects of wealth, are now facing scrutiny over their returns. But what’s truly fascinating here isn’t just the numbers; it’s the broader implications for how we think about investing, risk, and the elusive pursuit of outperformance.
The Numbers Don’t Lie—Or Do They?
Let’s start with the data. Over the past year, passive fund managers like Kernel and Simplicity have outshone their active counterparts, delivering returns of up to 17.53% compared to active managers’ 3.7% to 9.34%. On the surface, it’s a clear win for passive strategies. But here’s where it gets interesting: these numbers aren’t just about who’s better; they’re a reflection of a much larger trend in global markets.
Personally, I think what many people don’t realize is that passive funds often thrive in markets dominated by a handful of high-performing stocks. Take the recent AI boom, for instance. If your fund wasn’t heavily invested in tech giants like NVIDIA or Microsoft, you likely missed out. Active managers, with their focus on diversification and risk management, are structurally disadvantaged in such environments. It’s not that they’re bad at their jobs—it’s that the game is rigged against them when markets become concentrated.
The Active vs. Passive Debate: A False Dichotomy?
The debate between active and passive management isn’t new, but it’s rarely framed in a way that acknowledges the nuances. Active managers charge higher fees because they’re supposed to bring something extra to the table—insight, strategy, and the ability to navigate volatility. But as Dean Anderson of Kernel points out, even the best strategies can falter when markets are driven by unpredictable events, like geopolitical tensions or tech bubbles.
From my perspective, the real issue isn’t whether active or passive is better; it’s whether investors understand what they’re paying for. Active management isn’t just about beating the market—it’s about managing risk, especially in downturns. Yet, as Anderson notes, active managers haven’t consistently outperformed even in volatile periods. This raises a deeper question: are investors paying a premium for a service that isn’t delivering on its core promise?
The Long Game: Why Short-Term Returns Are a Red Herring
One thing that immediately stands out is how fixated we are on short-term performance. A three-year period, as Murray Harris of Milford Asset Management argues, doesn’t capture a full investment cycle. Markets are cyclical, and strategies that underperform in one phase can shine in another. What this really suggests is that we’re judging managers on the wrong metrics.
In my opinion, the focus on short-term returns is a symptom of a broader cultural issue—our impatience and desire for instant gratification. Investing isn’t a sprint; it’s a marathon. Yet, we’re quick to label managers as failures when they don’t outperform in a single year. This short-termism not only undermines trust in active management but also encourages risky behavior, as managers chase quick wins to keep up with the Joneses.
The KiwiSaver Paradox: Size Matters
A detail that I find especially interesting is the role of scale in all of this. KiwiSaver funds have grown exponentially, but New Zealand’s stock market hasn’t kept pace. As Anderson explains, when funds get too big, it becomes harder to maneuver without moving the market. This is particularly challenging for active managers, who rely on agility and flexibility to outperform.
If you take a step back and think about it, this highlights a structural issue in New Zealand’s investment ecosystem. Our market is small, and our managers are competing on a global stage. Without access to the same resources or opportunities as their international peers, it’s no wonder they’re struggling to keep up. This isn’t just a problem for fund managers—it’s a problem for every KiwiSaver member whose retirement depends on these funds.
The Human Factor: Luck, Skill, or Something Else?
Gertjan Verdickt of the University of Auckland makes a compelling point: outperformance in active management is often attributed to luck rather than skill. But here’s where it gets complicated. Even if a manager’s success is partly due to luck, it’s the consistency of that success that matters. Greg Smith of Generate highlights that sustained outperformance over a decade is rare, but it does exist.
What makes this particularly fascinating is how it challenges our assumptions about investing. We like to think of markets as rational, but they’re often driven by human behavior—fear, greed, and herd mentality. Active managers who can navigate these psychological currents are the ones who truly add value. Yet, as markets become more efficient and information more accessible, even this edge is eroding.
The Future of KiwiSaver: What’s Next?
If there’s one takeaway from all of this, it’s that the KiwiSaver landscape is at a crossroads. Passive funds may be winning the battle, but the war is far from over. As markets evolve and new challenges emerge, the role of active management will need to adapt. Perhaps the solution lies in a hybrid approach—combining the cost-efficiency of passive strategies with the risk management of active ones.
In my opinion, the real opportunity here is for investors to become more discerning. Instead of chasing returns, we should focus on understanding the underlying strategies and aligning them with our long-term goals. After all, investing isn’t just about making money—it’s about building a future. And in that future, both active and passive strategies have a role to play.
So, the next time you check your KiwiSaver balance, remember: it’s not just about the numbers. It’s about the story behind them—and the choices we make today will shape the narrative for years to come.
