Inside Money

Business writer David Chaplin blogs on personal finance

Inside Money: A tale of two Towers

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"It's a pity," a source who did not wish to be identified told me yesterday, "that this story had to break on an Australian institutional investment website."

I do apologise but my story detailing Tower Investments' decision to bring management of its global equities in-house should at least bring in some much-needed (by me) export dollars.

But it is a pity, too, that the audience for such a brilliant piece of journalism is somewhat limited in New Zealand.

In an ideal world the, approximately, thousands of retail punters who have invested in Tower funds would have an opinion on whether their international shares should be handled by experienced off-shore fund managers or processed by an Auckland-based computer.

In this world, the news that Tower is moving to a 'quant-based' investment model for most of its $700 million ($500 million of which is in global shares) equity portfolio will wash over retail unit-holders with little resistance.

As part of the shift, Tower will sack six of the eight offshore managers it currently outsources international share investing to, handing the money to its Auckland investment team. Tower has pitched this as a performance-enhancement exercise but industry insiders suggest it's also a margin-recovery effort - it's not clear if the fees saved by chopping external managers will pass on to underlying investors.

It's not that Tower is necessarily doing the wrong thing by managing international shares from New Zealand - it's not alone in this - but it is a major change that retail investors should reflect on.

For example, Tower's move will affect investors in its KiwiSaver funds. Admittedly, as most of Tower's KiwiSavers have come through the default process the scheme's exposure to international shares is reasonably small. According to the Tower KiwiSaver 2010 annual report, the scheme had invested just over $11 million in international equities out of a total pool of almost $400 million.

(By March this year, Tower KiwiSaver funds under management stood at almost $580 million, according to figures supplied to Workplace Savings NZ.)

Sam Stubbs, Tower Investments chief, told me that the group's $700 million in equities is split fairly evenly between retail and wholesale investors.

Most of Tower's wholesale money is managed on behalf of the firm's insurance funds rather than external clients. However, the remaining Tower wholesale clients (super funds, charities etc) will probably be more attuned to the change of investment style than retail investors.
Indeed, it's understood that at least one super fund has already put its Tower investments out to tender following the news.

The Australians might be interested in that.

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