Q I have been reading about the influence that companies like Vanguard and Black Rock have globally, as they are among the biggest fund managers in the world and hold a majority share in many large companies. Some claim they are negative towards climate-change measures as they care only about profits, not the environment. My KiwiSaver is with ASB and I just read that they have appointed Black Rock to take over the investment management of $20 billion of their funds. Should I be worried?
A The power and influence of big fund managers such as Vanguard and Black Rock have grown significantly, largely driven by investors seeking low fees.
How do fund managers achieve low fees? Firstly, economies of scale. Fees are usually charged as a percentage of funds under management. A new actively managed fund may charge 1 per cent per annum plus a performance fee.
As a fund grows in size it achieves economies of scale which enable the manager to reduce fees quite significantly.
Secondly, following a passive rather than active fund strategy will result in lower fees. Actively managed funds seek to earn higher returns by researching securities and trading in anticipation of market movements. They need to pay the salaries of their staff to do this, plus trading costs.
In contrast, passive funds usually buy securities according to an index and do not make active decisions.
Your provider ASB KiwiSaver uses a passive strategy.
There are advantages and disadvantages with both strategies, and it is up to the individual to decide which they prefer.
Active managers can make more careful buying decisions, including environmental, social and governance considerations.
It sounds like this is important to you. You can see how your fund rates on the site Mindful Money.
I asked John Berry, co-founder and CEO of KiwiSaver provider Pathfinder, to comment on your question. He said: "Blackrock and Vanguard are the world's largest asset managers, and combined they look after nearly $25 trillion for their clients around the world. Their client list includes some KiwiSaver providers. Managing this amount of money makes them large shareholders in companies globally, for example they own 10-15 per cent of the likes of Facebook, Amazon, Microsoft and ExxonMobil.
"The majority of the money Blackrock and Vanguard manage is in passive funds, which means they 'track' a market index, like the S&P500 for US shares ... but they have started offering investment products that do include some environmental and social factors in the investment decision.
"Despite this, they have large holdings across all industries including oil, gambling and weapons companies. My view is each of them could do a lot more around climate change and investing with an environmental and social lens.
"But ultimately people choose to give Blackrock or Vanguard their savings. Those same investors can go elsewhere if they don't like their investment approach and don't feel a personal values alignment."
Our government has contributed to the push for lower fees, with a requirement that the current default KiwiSaver providers charge low fees on their default funds.
For some providers, they will either be losing money on these funds or they will use low-cost products from companies such as Vanguard and Black Rock.
Some KiwiSaver providers combine active and passive management styles. Overall, there are more active than passive KiwiSaver providers. If anyone wishes to know what style of investing their provider uses, they should ask them.
- • Shelley Hanna is the communications manager with Peak Portfolio Management Ltd which is a Financial Advice Provider licensed by the Financial Markets Authority. Disclosure information is available at www.peak.net.nz or call 06 8703838. The information provided in this article is of a general nature and should not be relied on as a recommendation to invest in a financial product. Send your KiwiSaver questions to email@example.com