Lack of PE investment in KiwiSaver means members miss out

There should be more KiwiSaver investment in private equity as long as it’s done with the right capability and skill, says Pathfinder CEO John Berry.

“There’s a reason high net worth investors in large, long-term sophisticated endowment funds invest in private assets. Over the long term they pay higher returns than listed markets if managed and diversified properly.”

While Pathfinder and other boutique KiwiSaver firms such as Generate and Booster invest in private equity, not enough providers are, says Berry. And KiwiSaver members are missing out.

However managing a private equity inclusive fund “properly” comes at a higher cost.

Pathfinder charges 0.84% to 1.29% which among other things covers extra staff, including those who look at private deals, plus additional audit and compliance requirements.

Berry would like to see a refinement of fee reporting to break out underlying asset classes such as venture capital (VC), private equity (PE) and infrastructure.

“We've got this drive for transparency on fees but people don't understand what they're getting in return or what they're not getting. Knowing you’re buying everything in the market in a purely passive simple process for a low fee may be what a lot of people want. But they should be aware of missing out on the opportunity for private equity investment in a more active management style which can be more discerning around things like responsible and ethical investment.”

He says the most important factor is actual returns after fees with Morningstar tables not led by who has the lowest fee but who generates the best returns after fees. “It’s not the low fee providers.

“We need to reorient the conversation around what is important with some simple data points. Past returns and fees are obvious ones, current holdings is another but it's actually returns after fees, not the level of fees.”

Differing shades of active management

Pathfinder CFO Paul Brownsey says there are different levels of active management.

“We're not just active managers in an index fund. We're active managers in private equity, illiquid fixed income bonds and things like that. So we have a bigger opportunity set than an active manager who is deciding whether to buy more Microsoft or Alphabet”.

Berry cites Brownsey’s decision to swing into action when bond markets were wildly overpriced, putting Pathfinder’s fixed income exposure at zero. Another example was in Q1 2020 when Pathfinder’s KiwiSaver conservative fund gained 1.82% compared to an average decline of 2.44%.

“[The outbreak of Covid] was probably the most volatile time in the markets in a short period we’ve ever seen, even more than the GFC which happened over months.” says Brownsey.

“We didn’t have bonds, we had low weights to equities going into that period and took a lot of risk off the table but we put it back after the market bottomed.

“We didn't have any particular insight about it, we were just prepared to take an appropriate risk view on what was happening when the market sold off significantly and then when it came storming back with money chasing.”

He sees no impediments to any KiwiSaver providing having 1-2% in private equity providing they have sensible liquidity risk management.

“Managers could start thinking about clients’ best interests rather than trying to get rid of all risk, extra effort, costs to their business and maximising returns for shareholders.

“The largest [KiwiSaver] fund is now $20 billion; if they put 1% into private equity, that's a lot of investments. In venture capital right now people are writing cheques for $1m to $2m and in PE anything from $1m – $5m.”

Financial adviser role

He says financial advisers have an important role to help clients navigate KiwiSaver. “Don’t just look at fees, look at what you get for the fee and returns after fees. And think about exposure to assets other than conventional listed markets. I think that’s a really important value-add for financial advisers.”

Berry says the more sophisticated the product gets the greater the need for advice.

“If everyone on the market offered simple, standard passive low fee services there’s no room for advisers in KiwiSaver. But you've got around 35 providers and there's so much differentiation between them in terms of active, passive, ethical, private assets, no private assets, there's a real role there for advisers.”

BlackRock out but could come back in

Despite divesting its BlackRock shares, Brownsey hasn’t ruled out investing in BlackRock’s proposed NZ renewable energy fund announced with the government.

Pathfinder decided to ditch its very small global holdings (0.3 to 0.4) after the US mega manager put Aramco CEO Amin Nasser on its board.

But depending how BlackRock’s NZ energy transition fund eventuates, if at all, he would give it due consideration.

“It’s a decision to make at the time; does the good you're investing in stand alone as a positive investment? As advertised, it may well be a great thing, however, we've seen no detail.”