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10 Apr 2015

Investments update

At Perpetual Guardian, our first priority is creating good outcomes for our clients. In the context of investments, this means that we focus on long-term returns, not what may or may not happen next week. So, what are long-term returns and what are the different strategies we employ to deliver them?

As is widely accepted, long-term investment returns are driven by compounding the total return from changes in asset prices, and the income generated on those assets. For example, a total return of 5% over five years, compounds to a little over 27.6%, and for 10 years that leaps to 62.8%. However, how to deliver on these returns is hotly debated by investors.

There are two main portfolio management strategies:

Active management, where the investment manager buys and sells specific investments in an attempt to beat an index or benchmark; and,

Passive management, where the investments are made in the same proportions to the investments underlying an index/benchmark, or they are made in an Exchange Traded Fund (ETF) in order to replicate a given index.

Over the years, experts have attempted to answer which strategy is best and current opinion falls firmly in favour of passive management. In his article, ‘The Arithmetic of Investment Expenses’, Nobel Prize-winning economist, William Sharpe, demonstrated to retirees how much more money they could have in retirement if they avoided actively managed funds in favour of passively managed funds. Sharpe showed that a person saving for retirement, who chose low-cost investments instead of higher-cost ones, could have an improved standard of living throughout retirement by up to 20%.

Active management is a mirage; it looks good on paper but also comes with higher costs which in turn lowers performance. Active management may also present investors with higher risk portfolios by concentrating investments into a few individual names, whilst with a passive approach, money is diversely invested in thousands of companies and bonds.

In the USA, a country rich in surveys, Dow Jones releases its S&P Indices Versus Active (SPIVA®) survey. This measures the returns of active managers against their benchmarks, and the persistency of those managers to deliver index beating returns.

The results are troubling. The SPIVA® survey shows that an “inverse relationship exists between the measurement time horizon and the ability of top-performing funds to maintain their status.” It goes on to show that in a survey of 363 large and mid-cap funds, less than 1% remained in the top quartile at the end of a five-year period. This is less than ideal for any investor who wishes to build wealth over a discernible investment time horizon and leads to the question, ‘is an active or passive strategy going to meet my investment goals over the long-term?’

It may be time for investors to question the status quo.

Tim Chesterfield has more than 20 years of experience in global financial markets, including 18 years as a Senior Global Equity Investment Manager.He has been responsible for asset allocation and sector strategies to maximise client outcomes. He has strong commercial and strategic acumen, with a focus on investment products and the delivery of scalable investment solutions.

Tim Chesterfield
Tim Chesterfield



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Perpetual Guardian is a trading name of The New Zealand Guardian Trust Company Limited and Perpetual Trust Limited. For Authorised Financial Advisers, a disclosure statement is available upon request and free of charge.