20 February 2020

FMA Debate discusses whether passive or active management is best

Media release
MR No. 2020 – 1

Leaders from New Zealand’s investment industry gathered in Auckland last night to debate whether investors benefit more from passive or active fund management, a topic that is dividing the sector.

The event, hosted by the Financial Markets Authority (FMA), featured the moot: ‘passive management gives investors the best outcome’.

Most KiwiSaver funds and managed funds in New Zealand claim to be actively managed, yet passive management has been on the rise globally.

Passive management is when fund managers mirror a market index or portfolio, such as the NZX50 and the S&P500. For example, if the market has 1% of a certain asset, a passive fund will hold 1% too. Active management involves managers trying to outperform a certain index by buying or selling particular assets based on their expectations and analysis. This is colloquially known as “stock picking”.

Active management tends to have higher fees and commentators have questioned whether it outperforms market indexes.

On the night of the debate, the audience voted that the negative (active management) team presented a better argument.

FMA CEO Rob Everett said the regulator wanted to kick off the year and decade with an event that got the industry thinking about what is turning into a defining topic of the 2020s.

“The merits of each investment style is a debate happening here and round the world and one we want New Zealanders to fully understand. It’s fair to say New Zealanders never been more interested in financial markets, thanks of course to KiwiSaver,” Everett said.

“This event sets the scene for our future work on passive and active management styles, part of our value for money focus on KiwiSaver.”

Sam Stubbs of Simplicity, Hugh Stevens of Smartshares and Fiona Mackenzie of Jarden argued the affirmative, while Rebecca Thomas of Mint Asset Management, John Berry of Pathfinder and Paul Gregory of PIE Funds argued the negative. Mint Asset Management’s David Boyle was MC.

A recording of the livestream can be found here.

Key quotes and moments from the debate
Sam Stubbs (passive management): “It’s a fact that active management is just passive managing in drag.”

Rebecca Thomas (active management): “I’ve brought along my passive management toolkit (*holds up blindfold and earplugs*) – it’s for long-haul investing instead of a long-haul flight. A blindfold to select the best securities and earplugs for listening to my clients’ outcome preferences.”

Hugh Stevens (passive): “The problem is the evidence, the problem is the numbers… Simply put, active management is a zero sum game. You have the winners (*points to affirmative team*) and the losers (*points to negative team*). In every active trade someone beats the market and someone loses and underperforms the market. And then you add the fees.”

John Berry (active): “I would like to introduce you to the number zero (*reveals large cardboard ‘0’ prop*). This represents the number of passive funds that are designed to outperform their index – this year, next year and forever.”

Fiona Mackenzie (passive): “It’s all very well to have a great year one year but what you need to generate for your clients is persistent return year after year. [Research shows] the ability to continue performing year after year is very difficult… I noticed my colleagues didn’t bring a crystal ball – that is basically what you would need if you want to understand or predict which active managers are going to outperform.”

Paul Gregory (active): “The reality for investors in any market to have any outcomes at all – let alone best outcomes – you have to use active management. Without active investors, passive markets are stagnant, elephant graveyards. Active management makes the world go round.”

John Berry (active): “If we were all passive and totally mediocre, no one would have climbed [Mount] Everest, no one would have gone to the moon and no one would have invented the wheel. History tells us the best outcomes don’t come from being passive – passive delivers zero.

Sam Stubbs (passive): “We heard a great thing from John – ‘passive people haven’t been to the moon, they didn’t invent the wheel.’ Hold on, Boeing – which went to the moon – is in the index. Lockheed, which went to the moon, is in the index.

ENDS

Notes: The FMA does not have a preference for active or passive management. Its remit is to promote fair, efficient and transparent financial markets.

The speakers were asked to participate to generate discussion and not necessarily convey their personal views.

Highlights video