Simplicity, a prominent KiwiSaver fund manager, has been undergoing a transformation in its investment strategies. This shift from passive to active management is noteworthy and deserves a detailed examination. This article delves into the various facets of Simplicity's investment approach, exploring the transition, the areas where Simplicity believes it has an advantage, and the justifications for these changes. We then debate whether this is a positive or negative for investors in its funds.
The Shift from Passive to Active Management
Passive Management: The Traditional Approach
Historically, Simplicity has been known for its passive management approach, where investments were made to mirror particular market indexes. This approach, also known as indexing, follows simple rules that try to track an index or other benchmarks by replicating them.
Active Management: The New Direction
Recently, Simplicity has shown a noticeable shift towards active management. In this approach, investment decisions are made by professionals with the goal of outperforming a designated benchmark. This involves tracking the performance of an investment portfolio and making buy, hold, and sell decisions about the assets in it.
Examples of Simplicity's Active Investments
Investing in Private Equity and Venture Capital
- Stake in Icehouse Ventures: Simplicity has adopted a more passive approach by buying a stake in Icehouse Ventures, investing in their funds, and mandating them to buy many small stakes in credible start-ups.
- Growth Strategy: As these companies grow, Simplicity hopes to grow with them, typically wanting a minority stake of 5-10% of shares.
Creating Build-to-Rent Schemes
- Investment in Rental Homes: Simplicity has expanded into the build-to-rent sector, with investments in rental homes, expecting reliable investment cash flow over time.
- Long-term Enterprise: Simplicity believes that this is the type of long-term enterprise that KiwiSaver savings should be looking at.
Investing in First Home Mortgages
- Competitively Priced Mortgages: Simplicity has developed a way to offer first home loans funded by investment from its schemes, targeting an investment return above what would be earned from bonds.
- Conservative Lending Terms: The lending terms are intentionally conservative, and in the first two years, there has not been a single loan default.
Areas of Advantage in Unlisted Investments according to Simplicity
Loans Secured by First Mortgages
- Investment Strategy: Simplicity has invested between 3-15% in first home mortgages, depending on the fund chosen, with very conservative lending terms.
Simplicity Living (Build to Rent/BTR)
Investment in Apartments: Investments in apartments that are rented long-term and owned by pension funds, providing stable long-term returns.
Global Trend: Over 40% of people in the OECD live in apartments, and a lot of them are rented long-term and owned by pension funds.
Venture Capital and Private Equity
Adopting Global Practices: Simplicity has adopted a proven formula many large offshore venture capital companies have adopted, requiring available investment dollars to 'back the winners' as they grow.
Simplicity's Justifications for the Shift
Alignment with Global Practices
Common Practice Overseas: Investing in unlisted assets like build-to-rent housing is common in overseas pension funds but less so in New Zealand.
Banks' Dominance: Banks dominate the KiwiSaver space, and they prefer lending money rather than investing it.
Strategic Asset Allocations
- Increasing Asset Allocations: Simplicity plans to increase its asset allocations to housing, affordable homes, mortgages, and lending for start-ups and successful businesses.
- Investments into Unlisted Securities: Regular reviews are conducted for investments into unlisted securities, including monthly valuations for venture capital investments.
The Case for the Shift
Simplicity's move towards more active management could be seen as a strategic evolution in response to changing market dynamics. By diversifying their investment approach, Simplicity may be aiming to tap into opportunities that passive management might not capture. Active management allows for more tailored investment decisions, potentially leading to higher returns in specific sectors. This shift might also align Simplicity with global investment trends, where a blend of active and passive strategies is often employed.
The Case Against the Shift
On the other hand, Simplicity's move towards active management raises questions, especially considering their marketing focus on the idea that active management does not work. This stance has been a cornerstone of their brand identity, and the shift might be seen as a contradiction to their previously stated beliefs. Critics might argue that Simplicity's money does not seem to be where their mouth is, leading to potential trust issues among investors who were attracted to the firm's commitment to passive management.
Moreover, the shift to active management might expose investors to higher risks and costs. Active management often involves higher fees and requires a more hands-on approach, which might not align with the investment philosophy of those who chose Simplicity for its passive strategies.
A Balanced Perspective
The debate over Simplicity's shift from passive to active management is complex and multifaceted. On one hand, the move could be seen as a strategic response to market opportunities and global trends. On the other hand, it might be perceived as a departure from the firm's core beliefs, potentially undermining trust.
Ultimately, the success or failure of this shift will likely depend on how well Simplicity can articulate the rationale behind the change, align it with their overall investment philosophy, and demonstrate that the move is in the best interest of their investors. Transparency and clear communication will be key in reconciling this apparent contradiction between their marketing stance and their evolving investment strategy.