March 5, 2025 • 27 mins
Would you rather put your cash in the hands of skilled managers, or is just reliably tracking the market the smarter play?
With global markets experiencing big swings, many of us are having a hard think about our investing strategies.
This is part one of a two-part series examining the risks and rewards of both active & passive styles of investing.
In this conversation with Pie Funds CEO Ana-Marie Lockyer, we dig into how active and passive investing fare in turbulent times. Ana-Marie pushes back on the common belief that passive is the safer bet, outlining how market fluctuations can pose challenges for passive funds, while active managers can potentially identify opportunities and mitigate risks.
Look out for the passive-focused episode next week.
For more or to watch on YouTube—check out http://linktr.ee/sharedlunch
Shared Lunch is brought to you by Sharesies Limited (NZ) in New Zealand
Appearance on Shared Lunch is not an endorsement by Sharesies of the views of the presenters, guests, or the entities they represent. Their views are their own. Shared Lunch is not personal financial advice and provides general information only. We recommend talking to a licensed financial adviser. You should review relevant product disclosure documents before deciding to invest. Investing involves risk. You might lose the money you start with. Content is current at the time.
Pie Funds Management Limited is the manager and issuer of the funds in the Pie Funds Management Scheme and Pie KiwiSaver Scheme (the Schemes). The product disclosure statements for the Schemes are available at: www.piefunds.co.nz/investor-documents.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
An active manager will look at bad news and say, hmm,
does that bad news fundamentally change the strategic price of
this company. What we've seen is Tariff's being introduced, Tariff's
not being understood, a huge amount of noise in the US,
and the market now readjusting and saying, you know, it's
not quite as positive as we thought it was going
(00:21):
to be. Well, it's stalking, but probably what I'd call
is good research, good research, quality insights, understanding where you
believe the company should fundamentally be valued versus where it's
valued today.
Speaker 2 (00:35):
Curakoto, Welcome to Shared Lunch. I'm Garth Bray. Active investing,
picking what to buy, sell or hold. It can be
an experience or rewarding journey, but not for the faint hearted.
At the same time, it's easier than ever to opt
in to exchange traded funds ETFs and adopt a more
passive strategy. So we're talking to investment strategists and experts
(00:57):
about those two approaches, active and passive. And today we're
joined by the CEO of Pie Funds, Anna Marie Lockyer.
We'll be talking in an upcoming episode to a passive specialist,
and it's important to think of these as two halves
of the same game. But before we get into all
of that, here some important information you should always consider
when investing.
Speaker 3 (01:18):
Investing involves the risk you might lose the money you
start with. We recommend talking to a licensed financial advisor.
We also recommend reading product disclosure documents before deciding to invest.
Everything you're about to see and here is current at
the time of recording.
Speaker 2 (01:32):
Welcome, Hi, Welcome to shared lunch.
Speaker 1 (01:33):
Thank you for having me Gar.
Speaker 2 (01:35):
Look, when we talk about active investing, is it literally
just the art of picking winners?
Speaker 1 (01:40):
I mean, active investing is a strategy. We're an investor
or a company like Pie Funds. An active investment manager
will make deliberate decisions to buy, sell, or hold a stock.
They'll make those decisions in an attempt to outperform the
market or a specific benchmark, and they may do that
based on research, market trends, valuations, or experience. Passive investing,
(02:06):
on the other hand, is in contrast, the goal really
is just to match the market returns, like tracking an
index that might be the NZX fifty, that might be
the S and P five hundred. Investors there will typically
just use ETFs or index funds which have a lower
fee to aim to match market performance. I was I
(02:29):
overheard a call actually this morning with our investment experts
who said the DAX, which is the German index of
their top companies, had had a fifteen percent increase over
the last year. Fifty eight percent of that fifteen percent
increase came from one stock. So if an investor is
(02:51):
sitting in a passive fund, they are going to get
the fifteen percent increase. If an investors sitting in an
active fund and their active manager has researched the companies
within that index and chosen SAP, which had contributed fifty
eight percent, they would overweight SAP, for example.
Speaker 2 (03:11):
And that's where you get the difference.
Speaker 1 (03:13):
And that is where active managers truly aim to add
performance over the long term.
Speaker 2 (03:19):
Is that hard to explain to some clients, I suppose
because they might be a little bit nervous and thinking, oh, gosh,
it's a lot of volatility. Can I trust these people
to write it out for me?
Speaker 1 (03:29):
Yeah, I think. I mean, a passive investor will get volatility.
An active investor may get more or less volatility, depending
on how the composition of the portfolio is playing out. Again,
if we're thinking about kipsaver investors and the need to
accept volatility, it is really important they think about the
long term. Recently, there was a little bit of volatility
(03:52):
in the market and that would have been experienced by
both passive and active investors, and one of our clients
change the profile of their fun choice from a growth
fund to a conservative fund. You know, over long term,
growth funds obviously give far greater returns. We call them
(04:13):
up the next day to have a chat to them
to say, you know, are you comfortable with that, You're
still quite young, are you comfortable to move to have
less exposure to growth assets today? And have you made
an informed decision? The response was, I had a couple
of wines, I panicked, and therefore I probably didn't make
the right decision. So thanks for sharing the information with me. Actually,
(04:36):
the right thing for me today is to stay in
a growth type asset.
Speaker 2 (04:40):
So that sounds like a lot better than a hangover.
Speaker 1 (04:43):
Yeah, that's for sure, as far greater outcomes over long time,
long term that's.
Speaker 2 (04:47):
For long hanger, right, I guess. So looking at how
Pythons does that, you talk about outperforming markets by investing
in growth companies where do you start with identify some
of those growth picks.
Speaker 1 (05:01):
I guess Pythons started back in two thousand and seven
where Mike Taylor actually as an eighteen year old started
making money from South by investing in growth companies and decided,
actually he'll share some of those skills with clients, so
he formed Pie Funds, and Pie Funds is all about
active investment, Understanding companies, understanding what makes companies tick, understanding
(05:26):
who's running companies, to make picks where we're going to
add performance.
Speaker 2 (05:30):
So if you are thinking about a company where you
are looking at that situation of trying to add performance
or make an investment decision, how do you identify which
ones to go with?
Speaker 1 (05:40):
I love sitting with our Australian investment team. They are
on the ground in Sydney. They are talking to companies
every single day. They're reading reports of companies every single day.
They know what's happening in those companies and they have
the air to the ground. They have the phone or
the front door of the CFO, the CEO of organizations
to try I understand what's happening in a company, who's
(06:02):
running that company, what management buying, isn't that company and
therefore starting to make decisions about how strong that company is,
where it's heading, and how it might be priced into
the future versus how it's priced today.
Speaker 2 (06:15):
So you're talking about knowing the people. So that's a
little bit of talking to them and a little bit
of stalking, right, a little bit of looking at the results. Sorry,
probably not the way that you would phrase it, but
you actually how much of that is just one to
one gaining information about that company.
Speaker 1 (06:28):
Look, I think when you're playing for growth companies and
you're playing for small cap companies and you're trying to
add value over and above the index, you really need
to be connected to those companies. So call it stalking,
But probably what i'd call is good research, good research,
quality insights, understanding where you believe the company should fundamentally
be valued versus where it's valued today, and that will
(06:51):
help you make a decision as to whether you should
be buying, whether you should be selling, or whether you
should be holding.
Speaker 2 (06:57):
I guess you and a lot of other active fund managers, though,
are going to be chasing all of those same tips.
Is there a particular inside route that you take?
Speaker 1 (07:06):
Look, I think the beauty of the team in Sydney.
Is they're on the ground with those companies, they can
knock on the door. They're in there in the time zone.
And also with the team in the UK, they're in
there in the time zone, so they know what's happening
in real time with those companies. Look, there's a big
universe out there. At PI Funds, we play to add
value in the smaller universes, in smaller caps, and that's
(07:26):
what's really important to be over and close to those companies.
Speaker 2 (07:32):
Sure, I guess because a lot of those companies don't
necessarily get massive exposure in media, for example, or they're
not closely covered by analyst notes and the kinds of
paperwork that might be flowing around information that other investors
might get access to.
Speaker 1 (07:44):
Yeah, look, I think I mean a number of research
things that our teams would be looking at absolutely broken oes,
research notes, relationships, word on the street. But that in
itself is not enough. Then they will create my models.
Then they will work on models and ask questions and
also ask those questions direct of the companies to try
(08:07):
and get a feel for actually is it fundamentally priced
different today to where we'll believe in the future, or
actually now is the time to sell because actually we've
seen it reach where we think it's profits are going
to get to, and let's take the gains for our investors.
Speaker 2 (08:22):
I guess if we're thinking about right now and the
sort of extraordinary volatility we've seen just in the last
couple of weeks, not just stuff coming in from the
political spectrum, but just with sort of results from some
of those enormous market leaders in the US, is this
a point where the active approach is really starting to
take some risks, where you've got some opportunities but also
(08:43):
some big risks to consider. Yeah.
Speaker 1 (08:45):
Look, I think risk management's really important around active management obviously,
But I've just jumped off call with our Aussie investment
team and they've just finished the Australian reporting season. And
in the Australian reporting season, of course all companies front
up with their result. They do it over a sort
of three to four week period of time, and there
has been the most extreme volatility within the reporting results,
(09:08):
with a lot of them reporting really really good results
at the beginning and a big sell off and then
prices falling quite steeply and then increasing again and adjusting.
You know, they've seen obviously that revenues have stayed with
minimal growth, but margins are increasing through really really strong
cost management. So then they're starting to think, well, what
(09:29):
does that mean for us? Where are the winners and
losers going to be? Where do we take the profits?
Because this volatility is just up and down at the
moment in the reporting season, and they've made some big
calls on some big companies at the right time to
take those profits. I mean, in terms of volatility around
the world. End of last year, I think everyone thought, great,
(09:49):
Trump's in and Trump's going to drive a lot of
value for US businesses, and the markets all started reading
into that thinking, you know what, great, We're on an
upward trajectory in the US. Obviously, over the last two months,
what we've seen is Tariff's being introduced, Tariff's not being understood,
a huge amount of noise in the US in terms
(10:10):
of Trump's policies coming through, and the market now readjusting
and saying, you know, it's not quite as positive as
we thought it was going to be. So, you know,
it's a really really hard time for a passive fund
to be trying to understand what's out there, Which is
the beauty of having active managers really looking understanding the
(10:32):
markets and making calls based on real time information. Yeah.
Speaker 2 (10:37):
If I think about some of those contemporary issues, one
that's sort of blown up as this whole idea around
companies following or not following or abandoning DEI policies and
that kind of thing. That's kind of a topical issue
at the moment. We're seeing a lot of push and
pull from corporates inside the US at the moment. Apple's
been in a bit of a showdown with the White
House around that, I think, And we've also think seen
(10:57):
quite a lot of those ESG funds perhaps closing or
some of them some of them shutting down. And I
mean I've got politicians here that are accusing our major
banks of being woke. When you, as a fund manager
are looking at that, I mean, do you think investors
are less likely now to consider a company which doesn't
have that kind of policy or that they're they're there
(11:19):
that doesn't take their ESG commitments seriously or is there
still that appetite Like.
Speaker 1 (11:24):
I think ESG has moved on a long way for
any company, and certainly as an active manager, we look
at ESG, we have a responsible investment policy, which means
for every company that we invest in, there have to
be certain criteria to be considered to ensure that it
meets our policy. Look, if I turn back the clock,
maybe say ten years ESG was something on the side.
(11:49):
SG now in today's world is actually priced into valuations
of organizations, and therefore ESG whilst you say they might
be closing down, actually ESG is actually considered in the
fundamental now of both stock picking valuations and therefore are
priced into the models.
Speaker 2 (12:04):
So it's very mainstream in that it's.
Speaker 1 (12:06):
Becoming far more mainstream.
Speaker 2 (12:07):
Absolutely, And on the DEI stuff, that's a little too
early to tell.
Speaker 1 (12:11):
Look, I think DEI is a moving feast, isn't it.
I think there is absolute evidence that DEI does support
great outcomes for businesses and there will be continuing I mean,
despite Trump's call on it. I think corporates will continue
to see the benefits. As you know, if I looked
ten years ago at ESG, that was separate. DEI will
(12:33):
be mainstream.
Speaker 2 (12:34):
If you are looking at other themes as an investment manager,
what are you looking around and spotting there?
Speaker 1 (12:41):
I guess a few things that we would look at
as an active investment manager would be undervalued stocks or
in fact overvalued stocks in terms of the decision to sell.
But let's take an undervalued stock. For example, there might
be a really well run company that has some temporary
bad news that's going to affect the share price. A
(13:03):
passive fund will take that bad news and it'll just
hit the index. An active manager will look at that
bad news and say, hmm, does that bad news fundamentally
change the strategic price of this company and its outlook?
Take for example, in Nvidia sold off a couple of
weeks ago on the deep seek news twenty percent. I
(13:25):
think drop on the day.
Speaker 2 (13:27):
Yeah, massive, like a trillion dollar loss, but.
Speaker 1 (13:29):
Absolutely however fundamentally quite a strong company. So a number
of active managers at that point might have gone, you
know what, we might be continuing to hold, or we
might acquire a little bit over this period of time
as we see how that deep seek news plays out.
Speaker 2 (13:44):
Whereas a passive manager is just going to track whatever
is going on our adjustments accordingly, I guess.
Speaker 1 (13:49):
I kind of I kind of align a passive manager
to a community football team. Everyone's going to go and
they're going to have a go. They're going to have
a play. Some will be great, some won't be so good,
you know, As opposed to an active manager, which is
more like a Premier league team, they'll be looking at
the conditions, they'll be looking at the players, they'll be
looking at the opposition. Then they'll be pulling a team
(14:12):
together and making sure they've got the best team on
the day for those conditions.
Speaker 2 (14:16):
Premier league teams tend to come with pretty high prices
on the players, you know, and big ticket prices too.
So the fees part of all of this is something
that people often raise and say, hey, look, you're paying
a lot. Obviously it costs a lot to do all
of these run, all these models, do this research, have
these skilled professionals taking a look. So how do you
(14:37):
make that argument? How do you say, hey, look, it's
money well spent because that is going to come off
whatever returns that you're achieving in.
Speaker 1 (14:43):
Yeah, I think first and foremost what I'd say to
any investor, be it a KEYP saver investor or a
shares investor, you shouldn't be looking at fees. You should
be looking at returns after fees. At the end of
the day, investment process is trying to grow your retirement
nest egg or your savings nest egg and therefore it'll
be the outcome of a number of things, performance, fees,
(15:05):
et cetera. So look at what you are getting after
fees as opposed to focusing on the fees. Yes, active
investing does attract higher fees, and that, like you say,
is due to research, analysis, frequent trading and the like.
On the other hand, passive investing doesn't because you know,
(15:25):
they're just simply tracking it index do.
Speaker 2 (15:27):
We think we make it easy and as there are
a pretty settled format now for being able to compare
returns net of fees and so on, so that I
guess so that investors actually are looking out there or
people that are looking at a key, we save a
plan and they can literally compare across to see where
it's likely to get them.
Speaker 1 (15:43):
Yeah, it's funny because I mean sorted a number of
other providers morning Star provide returns after fees, and they
are absolutely available. A lot of platforms will still, you know,
show here's your return, here's your fees, and of course
an individual goes straight to fees and they shouldn't be.
But yeah, I think look as as our investors continue
(16:05):
to I guess consider the final outcome and the impact
of that final outcome, then they will more and more
look at returns after fees.
Speaker 2 (16:15):
Do you look at I know there are some pretty
substantial studies produced by Speva. The index versus active reports
is one that sort of seems to consistently say, hey, look,
on average, most active funds struggle to beat the market.
And they would point that up as sort of an
example of saying, hey, this is something you need to
(16:36):
consider with investing. These other indexes as well that would
look around and pick particular funds, some of them yours,
and particular moments where you're doing better. How do you
explain all of that information? How do you deal with
all of that?
Speaker 1 (16:49):
I had a quick look this morning at the latest
KYP Saver morning Star results, and over the last one,
five and ten years, active managers have been top of
the pops in each of those categories, you.
Speaker 2 (17:02):
Know, in terms of ahead of the returns above above
the rutuns passive absolutely.
Speaker 1 (17:08):
So if you kind of think of it in such
a way that you know passive is going to track
down the middle, active managers are going to sit on
either side. There will be periods of course where they
gain and above the benchmark and periods where they're behind
the benchmark. But over the long term, active managers have
added more than the benchmark.
Speaker 2 (17:28):
So what do you think it's particularly in the last
couple of years that that's been the case.
Speaker 1 (17:33):
I mean, I think long term. Are you talking about
speavers results here? I mean it's been you know, quite
a volatile period over the last couple of years in
terms of markets and some there will be a lot
of active providers that are obviously winning in those markets
in some that aren't.
Speaker 2 (17:52):
If you're thinking about the sort of time lines that
they're talking about there one year, three year, five, When
you're looking at making investments, what's long term?
Speaker 1 (18:00):
Look, I mean, that's a really good question. When do
you need the money? What are you going to be
using the money for? I mean, as a twenty five
year old who's saving for their retirement, you know that,
and they'll probably take a little bit of a dip
at some point in time when they're buying their first house.
But the long term's forty five to call it sixty
five years now with increasing mortality rates, so that is
(18:22):
pretty long term.
Speaker 2 (18:24):
You know.
Speaker 1 (18:25):
More generally, I think long term investing across all of
the funds in New Zealand, you would say anything sort
of over seven to ten years is a long term?
Speaker 2 (18:34):
Is that a long enough term? I'm thinking we've got
some very long term problems. Does it just get too
complicated to sort of push things out beyond that or
is it that need of money?
Speaker 1 (18:41):
And well, I think this is where fun choice comes in,
you know, because anything where you're investing, anything where you're
investing for a period over ten years, you'll probably be
looking at a growth fund or a high growth fund
because that's where you will get greater returns over the
long term. And I think, you know, looking at any
shorter is really are you coming to retirement in the
(19:02):
next five years? Do you need the funds for family,
for property? And that's where you might dial down your
risk a little bit and have that certainty.
Speaker 2 (19:14):
I guess if we're looking at the activity that you
do as an active fund manager, you're kind of testing
the market, aren't you. You're kind of discovering prices so
to some extent, then are the passive funds kind of
taking a bit of a free ride on you.
Speaker 1 (19:31):
Well, I think the passive funds aren't really doing too much.
I mean, the passive funds, in my eyes, are like
a train getting from A to B on a train track.
You know. The active funds are probably more like having
a GPS in there and they're kind of going, oh,
my goodness, there's a bit of traffic here, or there's
a bit of weather here, and therefore we're going to
have to take this route to get there quicker or faster.
Whereas the train you kind of just actually that noise
(19:53):
in the market you're probably not making decisions on because
you are just buying the index and you're taking the
ups and downs with the index. I think one of
the bigger risks that those are impassive funds need to
consider obviously, is that you know, in periods of underperformance,
you will just take the underperformance, whereas an active manager
(20:14):
will be working hard to consider where the opportunities are
to beat the index in terms of that underperformance. They
might be doing that maybe because you know, they've recognized
the market trend. For example, one market trend you know
that I kind of look back in our portfolios is
around Spotify. At the beginning of COVID, you know, we
(20:36):
were looking at what Spotify might do where they're going
to play a place in streaming? Where are they going
to play a place in podcasts? And that's been a
fabulous investment for our portfolios. You know, through through research,
through insights, through foresights, I guess on what might happen
at an industry level. The other thing that an active
(20:58):
investor might do, you know this point around downturns, is
they might look at futures in terms of exposure to
sort of high risk sectors and they can apply, for example,
short the market via selling futures, where of course passive
and benchmark lead funds won't be able to do that.
Speaker 2 (21:20):
Right. That's obviously a slightly more risky kind of derivative
that you're dealing with there, But that's the kind of
latitude that you'd have.
Speaker 1 (21:27):
Absolutely yep, that you know how much cash you might
hold in periods of uncertainty, so that you can deploy
that cash quite quickly when you think there's really good
buyers to have that are going to add value to portfolios.
Speaker 2 (21:41):
So haw's the cash count looking at the moment at pipe,
I think, look, I think you've got a good war chest.
Speaker 1 (21:46):
No, I think I mean, I think we're probably sitting
at about ten to twenty percent in cash, and that's
available obviously for liquidity, but also to deploy where those
opportunities come up.
Speaker 2 (21:56):
Like, it must be hard to filter that noise out
of the market that you would talking about there, because
there just seems to be so much going on.
Speaker 1 (22:03):
It's funny. I was reading something the other day around
the noise in the market has never been greater. You know,
take America for example. In the past, decisions would be
made in the White House. They would then be well
thought about and pushed out publicly. But today decisions are
(22:25):
being discussed in real time like theater. Effectively, you're watching
you're watching what's happening out there. But it is really
important to get back down to the fundamentals of a
company that you're investing in, the fundamentals of a region,
or the fundamentals of a sector in terms of where
we might play and shuffle investments around in those spaces,
(22:47):
and the noise has to be filtered otherwise you kind
of drown.
Speaker 2 (22:53):
Yeah, I guess if we're thinking about that big picture,
I'm thinking about something that you said before about one
of the risks with indexes just just tracking down and
following down there I mean, is there that risk that
passive investing winds up inflating the value of some of
those market leaders. And I'm thinking about the end said,
not just the instex perhaps where you've got a company
(23:15):
like Fisher and Pikel Healthcare that's a huge part of
the market. But it's the same picture really in the
United States and the S and P where you've got
seven companies effectively dominating, and we're dominating, we're dominating.
Speaker 1 (23:27):
Not so much dominating at the moment. Yeah, Look, it
is really interesting in terms of the rise of passive
investing and the increase of flows going into passive vesting,
which I think you know is now up to about
half of all investable money around the world's going to passive.
So of course that will pump up prices up within
(23:50):
within the index and given the demand for following the index.
And again I guess I kind of again, look an
example of where we might look at and we can
bring it back home to New Zealand. Two, you know
a couple of funds in New Zealand that you might
look at and kind of go, if you've got two
retirement two retirement type businesses that you're looking like a
(24:14):
ryman's in a sumset, sitting in an index, and you're
kind of going, which one are you going to go for?
The index might get both. An active manager will look
at and make a call on one of them, and
one of them now is sort of playing at five
percent above and one is playing one percent above in
terms of returns over the last year. You know, it's
an active management. You know, we made the right choice.
(24:35):
We went for the one that's got five percent above,
you know. But that is part of the challenge of passive.
You're going to get a one and a five, which
is going to give you a lower average.
Speaker 2 (24:46):
What might be the risks, you think, to sum it up,
that are worth considering before you take a solely passive
investing approach rather than combining or looking at active.
Speaker 1 (24:56):
Yeah, look, I think there's probably three. I mean, passive
assumes that markets are always efficient and that's not the case,
you know. So one would be no risk management. A
passive fund won't adjust your exposure if a sector or
a company becomes overvalued or risky. Number two is there's
(25:20):
missed opportunities. Passive funds can't capitalize on the miss pricing
or emerging trends before they're widely recognized. And that's what
our experts are there to do for our investors. Understand companies,
understand markets, understand miss pricing, make those investments, understand when
(25:40):
to take profits. And I think, look, if a passive
fun tracks an index that's heavily weighted towards underperforming companies,
the investors of course may experience, you know, undervalued returns
for them. So look one percent, I think one percent
increase in performance for a key we saver investor at
(26:01):
the age of twenty five will contribute two hundred thousand
dollars to their retirement nest egg when they're sixty five
years old. You know, that's a big difference in terms
of return. So if you can outperform the industry, if
you can outperform benchmarks over the long term by one percent,
you're adding two hundred thousand dollars to your retirement saving
(26:24):
nest egg. And that retirement saving nest egg is for
you to pay yourself pocket money when no one else
is paying you.
Speaker 2 (26:31):
It's a great place to leave it. I think, thanks
very much, Jenna Cool, thank you Gas, and thank you
whether you're listening on Apple or Spotify, or iHeart or
watching on YouTube. Make sure you lock in so you
get that next episode that gives you the passive perspective
to balance what we've heard about active investing today and
all those other great insights you'll get from the shared
lunch episodes. Quid with two. That's us for now,
An active manager will look at bad news and say, hmm,
does that bad news fundamentally change the strategic price of
this company. What we've seen is Tariff's being introduced, Tariff's
not being understood, a huge amount of noise in the US,
and the market now readjusting and saying, you know, it's
not quite as positive as we thought it was going
(00:21):
to be. Well, it's stalking, but probably what I'd call
is good research, good research, quality insights, understanding where you
believe the company should fundamentally be valued versus where it's
valued today.
Speaker 2 (00:35):
Curakoto, Welcome to Shared Lunch. I'm Garth Bray. Active investing,
picking what to buy, sell or hold. It can be
an experience or rewarding journey, but not for the faint hearted.
At the same time, it's easier than ever to opt
in to exchange traded funds ETFs and adopt a more
passive strategy. So we're talking to investment strategists and experts
(00:57):
about those two approaches, active and passive. And today we're
joined by the CEO of Pie Funds, Anna Marie Lockyer.
We'll be talking in an upcoming episode to a passive specialist,
and it's important to think of these as two halves
of the same game. But before we get into all
of that, here some important information you should always consider
when investing.
Speaker 3 (01:18):
Investing involves the risk you might lose the money you
start with. We recommend talking to a licensed financial advisor.
We also recommend reading product disclosure documents before deciding to invest.
Everything you're about to see and here is current at
the time of recording.
Speaker 2 (01:32):
Welcome, Hi, Welcome to shared lunch.
Speaker 1 (01:33):
Thank you for having me Gar.
Speaker 2 (01:35):
Look, when we talk about active investing, is it literally
just the art of picking winners?
Speaker 1 (01:40):
I mean, active investing is a strategy. We're an investor
or a company like Pie Funds. An active investment manager
will make deliberate decisions to buy, sell, or hold a stock.
They'll make those decisions in an attempt to outperform the
market or a specific benchmark, and they may do that
based on research, market trends, valuations, or experience. Passive investing,
(02:06):
on the other hand, is in contrast, the goal really
is just to match the market returns, like tracking an
index that might be the NZX fifty, that might be
the S and P five hundred. Investors there will typically
just use ETFs or index funds which have a lower
fee to aim to match market performance. I was I
(02:29):
overheard a call actually this morning with our investment experts
who said the DAX, which is the German index of
their top companies, had had a fifteen percent increase over
the last year. Fifty eight percent of that fifteen percent
increase came from one stock. So if an investor is
(02:51):
sitting in a passive fund, they are going to get
the fifteen percent increase. If an investors sitting in an
active fund and their active manager has researched the companies
within that index and chosen SAP, which had contributed fifty
eight percent, they would overweight SAP, for example.
Speaker 2 (03:11):
And that's where you get the difference.
Speaker 1 (03:13):
And that is where active managers truly aim to add
performance over the long term.
Speaker 2 (03:19):
Is that hard to explain to some clients, I suppose
because they might be a little bit nervous and thinking, oh, gosh,
it's a lot of volatility. Can I trust these people
to write it out for me?
Speaker 1 (03:29):
Yeah, I think. I mean, a passive investor will get volatility.
An active investor may get more or less volatility, depending
on how the composition of the portfolio is playing out. Again,
if we're thinking about kipsaver investors and the need to
accept volatility, it is really important they think about the
long term. Recently, there was a little bit of volatility
(03:52):
in the market and that would have been experienced by
both passive and active investors, and one of our clients
change the profile of their fun choice from a growth
fund to a conservative fund. You know, over long term,
growth funds obviously give far greater returns. We call them
(04:13):
up the next day to have a chat to them
to say, you know, are you comfortable with that, You're
still quite young, are you comfortable to move to have
less exposure to growth assets today? And have you made
an informed decision? The response was, I had a couple
of wines, I panicked, and therefore I probably didn't make
the right decision. So thanks for sharing the information with me. Actually,
(04:36):
the right thing for me today is to stay in
a growth type asset.
Speaker 2 (04:40):
So that sounds like a lot better than a hangover.
Speaker 1 (04:43):
Yeah, that's for sure, as far greater outcomes over long time,
long term that's.
Speaker 2 (04:47):
For long hanger, right, I guess. So looking at how
Pythons does that, you talk about outperforming markets by investing
in growth companies where do you start with identify some
of those growth picks.
Speaker 1 (05:01):
I guess Pythons started back in two thousand and seven
where Mike Taylor actually as an eighteen year old started
making money from South by investing in growth companies and decided,
actually he'll share some of those skills with clients, so
he formed Pie Funds, and Pie Funds is all about
active investment, Understanding companies, understanding what makes companies tick, understanding
(05:26):
who's running companies, to make picks where we're going to
add performance.
Speaker 2 (05:30):
So if you are thinking about a company where you
are looking at that situation of trying to add performance
or make an investment decision, how do you identify which
ones to go with?
Speaker 1 (05:40):
I love sitting with our Australian investment team. They are
on the ground in Sydney. They are talking to companies
every single day. They're reading reports of companies every single day.
They know what's happening in those companies and they have
the air to the ground. They have the phone or
the front door of the CFO, the CEO of organizations
to try I understand what's happening in a company, who's
(06:02):
running that company, what management buying, isn't that company and
therefore starting to make decisions about how strong that company is,
where it's heading, and how it might be priced into
the future versus how it's priced today.
Speaker 2 (06:15):
So you're talking about knowing the people. So that's a
little bit of talking to them and a little bit
of stalking, right, a little bit of looking at the results. Sorry,
probably not the way that you would phrase it, but
you actually how much of that is just one to
one gaining information about that company.
Speaker 1 (06:28):
Look, I think when you're playing for growth companies and
you're playing for small cap companies and you're trying to
add value over and above the index, you really need
to be connected to those companies. So call it stalking,
But probably what i'd call is good research, good research,
quality insights, understanding where you believe the company should fundamentally
be valued versus where it's valued today, and that will
(06:51):
help you make a decision as to whether you should
be buying, whether you should be selling, or whether you
should be holding.
Speaker 2 (06:57):
I guess you and a lot of other active fund managers, though,
are going to be chasing all of those same tips.
Is there a particular inside route that you take?
Speaker 1 (07:06):
Look, I think the beauty of the team in Sydney.
Is they're on the ground with those companies, they can
knock on the door. They're in there in the time zone.
And also with the team in the UK, they're in
there in the time zone, so they know what's happening
in real time with those companies. Look, there's a big
universe out there. At PI Funds, we play to add
value in the smaller universes, in smaller caps, and that's
(07:26):
what's really important to be over and close to those companies.
Speaker 2 (07:32):
Sure, I guess because a lot of those companies don't
necessarily get massive exposure in media, for example, or they're
not closely covered by analyst notes and the kinds of
paperwork that might be flowing around information that other investors
might get access to.
Speaker 1 (07:44):
Yeah, look, I think I mean a number of research
things that our teams would be looking at absolutely broken oes,
research notes, relationships, word on the street. But that in
itself is not enough. Then they will create my models.
Then they will work on models and ask questions and
also ask those questions direct of the companies to try
(08:07):
and get a feel for actually is it fundamentally priced
different today to where we'll believe in the future, or
actually now is the time to sell because actually we've
seen it reach where we think it's profits are going
to get to, and let's take the gains for our investors.
Speaker 2 (08:22):
I guess if we're thinking about right now and the
sort of extraordinary volatility we've seen just in the last
couple of weeks, not just stuff coming in from the
political spectrum, but just with sort of results from some
of those enormous market leaders in the US, is this
a point where the active approach is really starting to
take some risks, where you've got some opportunities but also
(08:43):
some big risks to consider. Yeah.
Speaker 1 (08:45):
Look, I think risk management's really important around active management obviously,
But I've just jumped off call with our Aussie investment
team and they've just finished the Australian reporting season. And
in the Australian reporting season, of course all companies front
up with their result. They do it over a sort
of three to four week period of time, and there
has been the most extreme volatility within the reporting results,
(09:08):
with a lot of them reporting really really good results
at the beginning and a big sell off and then
prices falling quite steeply and then increasing again and adjusting.
You know, they've seen obviously that revenues have stayed with
minimal growth, but margins are increasing through really really strong
cost management. So then they're starting to think, well, what
(09:29):
does that mean for us? Where are the winners and
losers going to be? Where do we take the profits?
Because this volatility is just up and down at the
moment in the reporting season, and they've made some big
calls on some big companies at the right time to
take those profits. I mean, in terms of volatility around
the world. End of last year, I think everyone thought, great,
(09:49):
Trump's in and Trump's going to drive a lot of
value for US businesses, and the markets all started reading
into that thinking, you know what, great, We're on an
upward trajectory in the US. Obviously, over the last two months,
what we've seen is Tariff's being introduced, Tariff's not being understood,
a huge amount of noise in the US in terms
(10:10):
of Trump's policies coming through, and the market now readjusting
and saying, you know, it's not quite as positive as
we thought it was going to be. So, you know,
it's a really really hard time for a passive fund
to be trying to understand what's out there, Which is
the beauty of having active managers really looking understanding the
(10:32):
markets and making calls based on real time information. Yeah.
Speaker 2 (10:37):
If I think about some of those contemporary issues, one
that's sort of blown up as this whole idea around
companies following or not following or abandoning DEI policies and
that kind of thing. That's kind of a topical issue
at the moment. We're seeing a lot of push and
pull from corporates inside the US at the moment. Apple's
been in a bit of a showdown with the White
House around that, I think, And we've also think seen
(10:57):
quite a lot of those ESG funds perhaps closing or
some of them some of them shutting down. And I
mean I've got politicians here that are accusing our major
banks of being woke. When you, as a fund manager
are looking at that, I mean, do you think investors
are less likely now to consider a company which doesn't
have that kind of policy or that they're they're there
(11:19):
that doesn't take their ESG commitments seriously or is there
still that appetite Like.
Speaker 1 (11:24):
I think ESG has moved on a long way for
any company, and certainly as an active manager, we look
at ESG, we have a responsible investment policy, which means
for every company that we invest in, there have to
be certain criteria to be considered to ensure that it
meets our policy. Look, if I turn back the clock,
maybe say ten years ESG was something on the side.
(11:49):
SG now in today's world is actually priced into valuations
of organizations, and therefore ESG whilst you say they might
be closing down, actually ESG is actually considered in the
fundamental now of both stock picking valuations and therefore are
priced into the models.
Speaker 2 (12:04):
So it's very mainstream in that it's.
Speaker 1 (12:06):
Becoming far more mainstream.
Speaker 2 (12:07):
Absolutely, And on the DEI stuff, that's a little too
early to tell.
Speaker 1 (12:11):
Look, I think DEI is a moving feast, isn't it.
I think there is absolute evidence that DEI does support
great outcomes for businesses and there will be continuing I mean,
despite Trump's call on it. I think corporates will continue
to see the benefits. As you know, if I looked
ten years ago at ESG, that was separate. DEI will
(12:33):
be mainstream.
Speaker 2 (12:34):
If you are looking at other themes as an investment manager,
what are you looking around and spotting there?
Speaker 1 (12:41):
I guess a few things that we would look at
as an active investment manager would be undervalued stocks or
in fact overvalued stocks in terms of the decision to sell.
But let's take an undervalued stock. For example, there might
be a really well run company that has some temporary
bad news that's going to affect the share price. A
(13:03):
passive fund will take that bad news and it'll just
hit the index. An active manager will look at that
bad news and say, hmm, does that bad news fundamentally
change the strategic price of this company and its outlook?
Take for example, in Nvidia sold off a couple of
weeks ago on the deep seek news twenty percent. I
(13:25):
think drop on the day.
Speaker 2 (13:27):
Yeah, massive, like a trillion dollar loss, but.
Speaker 1 (13:29):
Absolutely however fundamentally quite a strong company. So a number
of active managers at that point might have gone, you
know what, we might be continuing to hold, or we
might acquire a little bit over this period of time
as we see how that deep seek news plays out.
Speaker 2 (13:44):
Whereas a passive manager is just going to track whatever
is going on our adjustments accordingly, I guess.
Speaker 1 (13:49):
I kind of I kind of align a passive manager
to a community football team. Everyone's going to go and
they're going to have a go. They're going to have
a play. Some will be great, some won't be so good,
you know, As opposed to an active manager, which is
more like a Premier league team, they'll be looking at
the conditions, they'll be looking at the players, they'll be
looking at the opposition. Then they'll be pulling a team
(14:12):
together and making sure they've got the best team on
the day for those conditions.
Speaker 2 (14:16):
Premier league teams tend to come with pretty high prices
on the players, you know, and big ticket prices too.
So the fees part of all of this is something
that people often raise and say, hey, look, you're paying
a lot. Obviously it costs a lot to do all
of these run, all these models, do this research, have
these skilled professionals taking a look. So how do you
(14:37):
make that argument? How do you say, hey, look, it's
money well spent because that is going to come off
whatever returns that you're achieving in.
Speaker 1 (14:43):
Yeah, I think first and foremost what I'd say to
any investor, be it a KEYP saver investor or a
shares investor, you shouldn't be looking at fees. You should
be looking at returns after fees. At the end of
the day, investment process is trying to grow your retirement
nest egg or your savings nest egg and therefore it'll
be the outcome of a number of things, performance, fees,
(15:05):
et cetera. So look at what you are getting after
fees as opposed to focusing on the fees. Yes, active
investing does attract higher fees, and that, like you say,
is due to research, analysis, frequent trading and the like.
On the other hand, passive investing doesn't because you know,
(15:25):
they're just simply tracking it index do.
Speaker 2 (15:27):
We think we make it easy and as there are
a pretty settled format now for being able to compare
returns net of fees and so on, so that I
guess so that investors actually are looking out there or
people that are looking at a key, we save a
plan and they can literally compare across to see where
it's likely to get them.
Speaker 1 (15:43):
Yeah, it's funny because I mean sorted a number of
other providers morning Star provide returns after fees, and they
are absolutely available. A lot of platforms will still, you know,
show here's your return, here's your fees, and of course
an individual goes straight to fees and they shouldn't be.
But yeah, I think look as as our investors continue
(16:05):
to I guess consider the final outcome and the impact
of that final outcome, then they will more and more
look at returns after fees.
Speaker 2 (16:15):
Do you look at I know there are some pretty
substantial studies produced by Speva. The index versus active reports
is one that sort of seems to consistently say, hey, look,
on average, most active funds struggle to beat the market.
And they would point that up as sort of an
example of saying, hey, this is something you need to
(16:36):
consider with investing. These other indexes as well that would
look around and pick particular funds, some of them yours,
and particular moments where you're doing better. How do you
explain all of that information? How do you deal with
all of that?
Speaker 1 (16:49):
I had a quick look this morning at the latest
KYP Saver morning Star results, and over the last one,
five and ten years, active managers have been top of
the pops in each of those categories, you.
Speaker 2 (17:02):
Know, in terms of ahead of the returns above above
the rutuns passive absolutely.
Speaker 1 (17:08):
So if you kind of think of it in such
a way that you know passive is going to track
down the middle, active managers are going to sit on
either side. There will be periods of course where they
gain and above the benchmark and periods where they're behind
the benchmark. But over the long term, active managers have
added more than the benchmark.
Speaker 2 (17:28):
So what do you think it's particularly in the last
couple of years that that's been the case.
Speaker 1 (17:33):
I mean, I think long term. Are you talking about
speavers results here? I mean it's been you know, quite
a volatile period over the last couple of years in
terms of markets and some there will be a lot
of active providers that are obviously winning in those markets
in some that aren't.
Speaker 2 (17:52):
If you're thinking about the sort of time lines that
they're talking about there one year, three year, five, When
you're looking at making investments, what's long term?
Speaker 1 (18:00):
Look, I mean, that's a really good question. When do
you need the money? What are you going to be
using the money for? I mean, as a twenty five
year old who's saving for their retirement, you know that,
and they'll probably take a little bit of a dip
at some point in time when they're buying their first house.
But the long term's forty five to call it sixty
five years now with increasing mortality rates, so that is
(18:22):
pretty long term.
Speaker 2 (18:24):
You know.
Speaker 1 (18:25):
More generally, I think long term investing across all of
the funds in New Zealand, you would say anything sort
of over seven to ten years is a long term?
Speaker 2 (18:34):
Is that a long enough term? I'm thinking we've got
some very long term problems. Does it just get too
complicated to sort of push things out beyond that or
is it that need of money?
Speaker 1 (18:41):
And well, I think this is where fun choice comes in,
you know, because anything where you're investing, anything where you're
investing for a period over ten years, you'll probably be
looking at a growth fund or a high growth fund
because that's where you will get greater returns over the
long term. And I think, you know, looking at any
shorter is really are you coming to retirement in the
(19:02):
next five years? Do you need the funds for family,
for property? And that's where you might dial down your
risk a little bit and have that certainty.
Speaker 2 (19:14):
I guess if we're looking at the activity that you
do as an active fund manager, you're kind of testing
the market, aren't you. You're kind of discovering prices so
to some extent, then are the passive funds kind of
taking a bit of a free ride on you.
Speaker 1 (19:31):
Well, I think the passive funds aren't really doing too much.
I mean, the passive funds, in my eyes, are like
a train getting from A to B on a train track.
You know. The active funds are probably more like having
a GPS in there and they're kind of going, oh,
my goodness, there's a bit of traffic here, or there's
a bit of weather here, and therefore we're going to
have to take this route to get there quicker or faster.
Whereas the train you kind of just actually that noise
(19:53):
in the market you're probably not making decisions on because
you are just buying the index and you're taking the
ups and downs with the index. I think one of
the bigger risks that those are impassive funds need to
consider obviously, is that you know, in periods of underperformance,
you will just take the underperformance, whereas an active manager
(20:14):
will be working hard to consider where the opportunities are
to beat the index in terms of that underperformance. They
might be doing that maybe because you know, they've recognized
the market trend. For example, one market trend you know
that I kind of look back in our portfolios is
around Spotify. At the beginning of COVID, you know, we
(20:36):
were looking at what Spotify might do where they're going
to play a place in streaming? Where are they going
to play a place in podcasts? And that's been a
fabulous investment for our portfolios. You know, through through research,
through insights, through foresights, I guess on what might happen
at an industry level. The other thing that an active
(20:58):
investor might do, you know this point around downturns, is
they might look at futures in terms of exposure to
sort of high risk sectors and they can apply, for example,
short the market via selling futures, where of course passive
and benchmark lead funds won't be able to do that.
Speaker 2 (21:20):
Right. That's obviously a slightly more risky kind of derivative
that you're dealing with there, But that's the kind of
latitude that you'd have.
Speaker 1 (21:27):
Absolutely yep, that you know how much cash you might
hold in periods of uncertainty, so that you can deploy
that cash quite quickly when you think there's really good
buyers to have that are going to add value to portfolios.
Speaker 2 (21:41):
So haw's the cash count looking at the moment at pipe,
I think, look, I think you've got a good war chest.
Speaker 1 (21:46):
No, I think I mean, I think we're probably sitting
at about ten to twenty percent in cash, and that's
available obviously for liquidity, but also to deploy where those
opportunities come up.
Speaker 2 (21:56):
Like, it must be hard to filter that noise out
of the market that you would talking about there, because
there just seems to be so much going on.
Speaker 1 (22:03):
It's funny. I was reading something the other day around
the noise in the market has never been greater. You know,
take America for example. In the past, decisions would be
made in the White House. They would then be well
thought about and pushed out publicly. But today decisions are
(22:25):
being discussed in real time like theater. Effectively, you're watching
you're watching what's happening out there. But it is really
important to get back down to the fundamentals of a
company that you're investing in, the fundamentals of a region,
or the fundamentals of a sector in terms of where
we might play and shuffle investments around in those spaces,
(22:47):
and the noise has to be filtered otherwise you kind
of drown.
Speaker 2 (22:53):
Yeah, I guess if we're thinking about that big picture,
I'm thinking about something that you said before about one
of the risks with indexes just just tracking down and
following down there I mean, is there that risk that
passive investing winds up inflating the value of some of
those market leaders. And I'm thinking about the end said,
not just the instex perhaps where you've got a company
(23:15):
like Fisher and Pikel Healthcare that's a huge part of
the market. But it's the same picture really in the
United States and the S and P where you've got
seven companies effectively dominating, and we're dominating, we're dominating.
Speaker 1 (23:27):
Not so much dominating at the moment. Yeah, Look, it
is really interesting in terms of the rise of passive
investing and the increase of flows going into passive vesting,
which I think you know is now up to about
half of all investable money around the world's going to passive.
So of course that will pump up prices up within
(23:50):
within the index and given the demand for following the index.
And again I guess I kind of again, look an
example of where we might look at and we can
bring it back home to New Zealand. Two, you know
a couple of funds in New Zealand that you might
look at and kind of go, if you've got two
retirement two retirement type businesses that you're looking like a
(24:14):
ryman's in a sumset, sitting in an index, and you're
kind of going, which one are you going to go for?
The index might get both. An active manager will look
at and make a call on one of them, and
one of them now is sort of playing at five
percent above and one is playing one percent above in
terms of returns over the last year. You know, it's
an active management. You know, we made the right choice.
(24:35):
We went for the one that's got five percent above,
you know. But that is part of the challenge of passive.
You're going to get a one and a five, which
is going to give you a lower average.
Speaker 2 (24:46):
What might be the risks, you think, to sum it up,
that are worth considering before you take a solely passive
investing approach rather than combining or looking at active.
Speaker 1 (24:56):
Yeah, look, I think there's probably three. I mean, passive
assumes that markets are always efficient and that's not the case,
you know. So one would be no risk management. A
passive fund won't adjust your exposure if a sector or
a company becomes overvalued or risky. Number two is there's
(25:20):
missed opportunities. Passive funds can't capitalize on the miss pricing
or emerging trends before they're widely recognized. And that's what
our experts are there to do for our investors. Understand companies,
understand markets, understand miss pricing, make those investments, understand when
(25:40):
to take profits. And I think, look, if a passive
fun tracks an index that's heavily weighted towards underperforming companies,
the investors of course may experience, you know, undervalued returns
for them. So look one percent, I think one percent
increase in performance for a key we saver investor at
(26:01):
the age of twenty five will contribute two hundred thousand
dollars to their retirement nest egg when they're sixty five
years old. You know, that's a big difference in terms
of return. So if you can outperform the industry, if
you can outperform benchmarks over the long term by one percent,
you're adding two hundred thousand dollars to your retirement saving
(26:24):
nest egg. And that retirement saving nest egg is for
you to pay yourself pocket money when no one else
is paying you.
Speaker 2 (26:31):
It's a great place to leave it. I think, thanks
very much, Jenna Cool, thank you Gas, and thank you
whether you're listening on Apple or Spotify, or iHeart or
watching on YouTube. Make sure you lock in so you
get that next episode that gives you the passive perspective
to balance what we've heard about active investing today and
all those other great insights you'll get from the shared
lunch episodes. Quid with two. That's us for now,
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