March 12, 2025 • 29 mins
Passive funds might be more aggressive than you think.
In this second of our two-parter on the benefits of active and passive investing strategies, Smart CEO Anna Scott reveals what it really means to track the market.
Anna explains the surprisingly active choices that go into building “passive” funds, and how passive fund managers can take defensive action during periods of market volatility. Plus: How are ETFs like coffee culture? What are the three Ps of fund management?
And is it possible that the sheer scale of passive funds can actually prop up the biggest market players, creating a ‘self-fulfilling prophecy’ about which investments have the strongest growth?
For more or to watch on YouTube—check out http://linktr.ee/sharedlunch
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
We do get a lot more queries during times of volativity.
Lots of people do what we call panic selling, and
that is that emotional reaction to oh my god, it
might lose more money, so I should sell it now
and cut my losses. Yes, you're cutting your losses, but
you're also crystallizing those losses. Key we Savor in New
Zealand has really grown this area of interest in a
diversified fund so that has brought a new complexity in
(00:23):
New Zealand. We have far less in index tracking funds
than Australia does, and that's far less again than America.
Say so, I think that's a little bit of that
sophistication journey.
Speaker 2 (00:37):
Kirakoto, Welcome to Shared Lunch. I'm Garth Bray. Active investing
picking what to buy, sell and the hold, and the
passive approach tracking the market, buying the momentum. They both
have their fans and their flaws. We are talking to
fund managers about both approaches and today I'm with Anna Scott,
the CEO of Smart to talk about that passes perspective.
(01:00):
We've also been speaking to an active fund manager, so
I consider this as the second half of that match.
But before you get into any of that. Here's some
important information you should always consider before investing.
Speaker 3 (01:12):
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 (01:26):
Hello Anna, good morning. You are running a series of
passive funds, aren't you. Yes, so you're probably the best
person to ask what is your definition of what passive
investing really means?
Speaker 1 (01:39):
Very good question, because I get asked this quite a lot,
and I think we try and sometimes get caught up
in that passive versus active debate. And I'm a big
believer in actually and you need a bit of both
for that. But yes, we do have a passive series
of funds. So when you think about what does a
fund do, the first thing you start with is what's
the objective of the fund? Now you can go and
read the pds to get that, but objectives and the
(02:00):
words that come with that talk about if you're going
to be passive, they will talk about match or replicate
or mirror. So their job is to track an index.
If you're in an active fund, it might say something
like beat or outperform. So the first thing is what's
your objective of your fund? And so a passive fund
or an index tracking fund is one that does exactly that,
(02:21):
it tracks an index. Then the next thing is, well,
what is the index that that fund is meant to
track or beat? So what is the benchmark? And when
you get into that, that isn't something that is determined
necessarily by us as a fund manager. There are a
bunch of companies who are index providers out in the market.
So you might have heard of SMP or MSCI, Bloomberg,
(02:41):
Fltsy do them and they create an index that reflects
a market. And most of the time those are market
tracking funds. That's the most common area, which means that
you're not in a diversified fund, but you've particularly chosen
a market.
Speaker 2 (02:55):
It sounds like a beguilingly simple idea. It's one that's
been around for a long time, or is this more
of a recent rise that we've seen.
Speaker 1 (03:02):
It's been around for a long time, But I think
that perhaps in the evolution or the sophistication of time,
ETFs have really brought those to the four because they're
listed on markets around the world. They're listed in those
market tracking component parts, rather than probably at the beginning
of funds when they were unlisted or a managed fund.
Lots of times those were hedge funds or a diversified
(03:25):
fund with an active manager. So now we're getting into
the component parts. I like to think of it actually
as everyone's sophistication level. It's a little bit like the
coffee drinker's journey. So at the beginning, and particularly in
New Zealand, if you go back, say five ten years,
you had two choices for coffee. It was black or
it was white. Maybe we then got onto the decaf
and now people have choices where they might have their
(03:46):
double shot trim flat latte, or you might have oat milk,
or you really want your beans to have been come
from Brazil. So we've got a lot more choice. And
I think that's the same as the investing public. There's
more choice there.
Speaker 2 (03:59):
I'm not sure where high class poor over fits into
that analogy, but I get what you're talking about that
there's an increasing kind of sophistication to the products and
so on. I mean, we know that the chezy's client
base and audience really are into those. What brought those about,
when did they first sort of emerge and what have
they enabled.
Speaker 1 (04:17):
So at the very beginning, you could only trade if
you had a broker, and that was a physical person,
right who traded on the exchange. That's become far more electronic.
We've seen the growth of online trading platforms and we've
seen that follow the global trend to where real everyday
people retail we call them in the investing market. Retail
customers want to get involved and diversify their own assets.
(04:39):
Because you think about the evolution of New Zealand. You
might have known about property, right we start and we
grow up on that the physical property that we live
in or maybe we rent out. Now we're diversifying. So
we talked about cash, and people knew about term deposits,
and then they knew about bonds and now equities and
it's an extension of that. So rather than go to
the share market and decide I'm going to select these
(05:00):
two stocks myself because I think they're going to be
winners on the long term, actually I can buy a
basket of those stocks. So the most common example that
we give is the US five hundred, because there's a
lot of interest in that as the biggest economy and
biggest market in the world. So when we create an
index tracking fund for the US five hundred, we are
giving the opportunity to track that market. So our job
(05:23):
is to mirror, to replicate, to give you the same
returns that that market would give you. But there's five
hundred stocks in that index. That's why it's called the
US five hundred. And when you do that, how do
you know which ones of those are going to be
the best performing or not. So a lot of people
like the idea that you are actually just getting the
returns of that market. So an index provider puts them
together with the waitings. They specify what those waitings are
(05:46):
and the proportion of those stocks within that, and then
our job as the fund manager is to buy each
of those five hundred stocks in the waiting to match
that that the index provider specifies. So our job is
to hold all five hundred in the same waiting to
give that investor the same return as if they were
doing that themselves, and the same return as that whole market.
Speaker 2 (06:08):
So if you're doing that in the S and P
five hundred, then like a third of that shareholding that
you've got to reflect that index is going to be
the Big seven, and then if there are movements there,
you're going to have to try and match those. Not
so much in real time, but you're catching up here. Yeah.
Speaker 1 (06:25):
Our job is the index provider will on a schedule,
most of them are quarterly, will specify that they will
rewait or rebalance the index, and so our job is
to match that. So every quarter you'll hear that talk
in the market about oh it's the rebalance week, and
a lot of movement and trading will go on in
index tracking fund managers because our job is to make
(06:46):
sure that when the index provider specifies that there's been
changes in market capitalization and value in the market and
they've reweighted all those companies, our job is to make
sure that our holding matches that.
Speaker 2 (06:58):
Waiting Again, it sounds a bit like football, like you know,
the English Premier League. You get sort of relegation or promotion.
You're either on the top of the table or you've
dropped off for whatever reason. Your performance as a company
doesn't entitle you to be in that bracket. As you say,
that happens like quarterly. Usually I know that there was
a rebalance. I think for a couple of the New
Zealand indexes end of last week or so on, YEP.
(07:21):
So you had, let's take a company, for example, Ryman
dropped out of the top ten yep and A two
jumped in there. But there would have been a lot
of change happened before that decision, and there's potentially a
bit of value that's gone missing. Is this the bit
that you have to just accept You don't get if
(07:41):
you are in a passive fund that you're going to
be catching up.
Speaker 1 (07:45):
So it comes back to what's your goals? Right in
index tracking funds, So in that debate about should you
be with a passive manager or an active manager, index
tracking funds are tracking a market, so you can decide
which slice of that market you can be US five hundred,
the ASX two hundred, emerging markets, Asia, Pacific, robotics and automation.
They're all slices of a market, and you're choosing the
(08:07):
market that you wish to be tracking the performance on.
And most of the time that's a long term play
because if you want to get the value of the
instex ten, say, over your investment horizon, then you're wanting
that whole market return over that horizon, whether there's a
little bit of lost value and one quarterly rebalanced cycle
(08:28):
because someone dropped out and someone Elstrup came in, and
you need to pay the cost of it in the
fund fee. Right, you're not paying additional to that, but
the fund cost of doing that trading in the long term,
that's not really part of the objective of the fund.
Forget what I mean. You know, if you're if you're
investing for twenty years until retirement, then when you're choosing
(08:50):
a fund manager, you're really saying, well, do I think
that the US five hundred over twenty years is going
to perform better or worse than an active fund manager
with specific portfolio managers and people making stock selections. And
that's why there's a lot of trend or data that
talks about long term investing horizons the market will be
(09:11):
to person, twenty years is a long time for the
same portfolio managers to sit there and manage that fund
in the same way and beat the market every single year.
And that's where you get that kind of passive because
it's about market growth and long term market growth versus
individual people stock picking. But that's a long term play.
If you're investing for a two year time horizon, you
might choose a particularly well performing fund with some massive
(09:33):
managers or folio managers who you think are really focused
on that, and you're not going to be worried about
whether the New Zealand twenty is going to be up
or down in two years time.
Speaker 2 (09:44):
We're in an error of volatility. Does that give a
preference one way or the other. Does it say, hey,
now's a good time to be looking at the noise
and trying to screen that out and go passive, or
is it, hey, you actually need to think about active
management to try and take advantage of that to deal
with stuff coming in much more quickly, news coming in
(10:04):
much more quickly. Change is happening much more quickly.
Speaker 1 (10:07):
So I believe in a bit of both. What about
in times of volatiley again, how long you're investing for?
What is your goal with that investment? So if I
was in Key with Saver and I think I want
to buy a house in the next year, well that
means that my risk tolerance ride is lower right now
because I don't want to be able to want to
take my money out at a downturn in the economy,
(10:29):
So it's about the diversification of where you're invested. And
we see, particularly in charesis when we look at the
top six ETFs that people are trading there, we can
see that people are actually building a portfolio. So in
that top six we have the US five hundred, the
NZD X fifty, the ASX twenty. Actually we have Asia
Pacific emerging markets. So actually we can see that people
(10:52):
are spreading their investment around the globe and around different
markets to try and smooth out that volatility.
Speaker 2 (10:59):
Is that the respectants to the flux that you're seeing
is that a lot of people are just going, Hey,
I'm just going to tune the noise out and I'm
going to go for the ride and work out that
twenty years from now to be fine. Or do you
a mean to you? As fund managers actually hearing from
people panicking and saying what do I do? Yeah?
Speaker 1 (11:15):
Volatility is always really concerning because money is a personal thing, right,
so it's emotional when you look at your balance and
it's down. So we do get a lot more queries
during times of volatilty because the point of being in
a market tracking fund is you're going to track the
performance of the market. So when the US market drops
off four percent overnight, then your value of your fund
(11:37):
holding is also going to do that. The point is
what are you invested for and should that matter? Lots
of people do what we call panic selling, and that
is that emotional reaction to oh my god, it might
lose more money, so I should sell it now and
cut my losses. Yes, you're cutting your losses, but you're
also crystallizing those losses. So if you don't need the
money today, you should hold on because if you look
(11:59):
at the historical trend on a long term basis, markets
largely go and grow. But that's not to say, right,
we always say that previous performance is no indication of future.
Do you really have to be clear about again what
you invested for. It's not the old adage of it.
It's not the timing the market and will you buy
(12:20):
and sell, it's actually time in the market. It's that accumulation,
it's the compounding investment. Those are the things over the
long term if you're saving for retirement that really help out.
Speaker 2 (12:32):
Sure, And I guess a part of that is the
cost of all of that activity and what it's costing
you to take part that's often a football that it's
thrown around. I suppose between the passive and active side, Right,
is that a passive approach you can afford to do
it a little bit more cheaply.
Speaker 1 (12:50):
Yeah, So we talk about the cost yep so the
three p's of fund management and when you look into
a fund to kind of the philosophy of the funds.
We talked about the objective, the process that they run.
So in an index tracking, that is the tracking and
the people who do that. People become far more important
in an active fund because you are actually selecting stocks
(13:11):
and in within that fund you have different objectives as well. Right,
you're trying to outperform or beat, but it's a particular
market you're trying to outperform. But when we look at
the costs over all of those, both of us, in
terms of all those types of funds, are paying an
index provider for an index. Some of those indexes are
more expensive and more esoteric than others, but you've got
that cost both sets trading. So you're going to rebalance,
(13:33):
or you're going to choose stocks that you no longer
like and think have value, or depending on the feature
of your fund, you might be volatility trading fund or
looking for cheapness versus long term value. But you're going
to make different selections and choices, so you're both going
to trade on that. Where it comes into the underlying
cost and where you traditionally see that an index tracking
fund would have a cheaper management fee is the cost
(13:54):
of research and the cost of people. Because if you
are an active fund manager and so you are pouring
over stocks and selecting those based on your own philosophy,
then that is a labor intensive job. You need more
research analysts in that team. You need to pay for
more research to get into what those companies' analytics are.
And you have a market professional who is a conviction
(14:17):
led stock picker, right, and that's not everyone's cup of tea.
There's a lot of nights that you don't sleep with
that when you've got a position on. So that is
inherently a more expensive fund to run for research and
expertise and number of people that you need in your
team versus a pure index tracking fund isn't going to
need that research because the job is to get the
(14:38):
index provider's information and weight your portfolio in line with that.
Speaker 2 (14:43):
I think someone we spoke to recently said it's the
difference between professional football and more social league football. Is
that an unfair comparison.
Speaker 1 (14:51):
There's probably a little unfair, but I think they just
so if we come back to the philosophy, they're very
different philosophies. You have a different job function in each
of those and if you're in a restaurant, say that's
a difference between being the sou chef or in charge
of the vegetable plating versus the overall headshift who's putting
together a whole menu. They're different jobs. And one thing
I think that we think about when we think about
(15:13):
active and passive is and this is why I continue
to talk about index tracking, because if there's an index
in a market, then that's what you're doing. In a
passive fund, that's your job right to replicate. In mirror key,
we Savor in New Zealand has really grown this area
of interest in a diversified fund. So that has brought
in new complexity. When you get into a diversified fund, anybody,
(15:37):
regardless of whether you're using index tracking, building blocks or
stock selection, you're making a active choice on how you
build that diversified fund. And so that's where the line.
I think that blurs between passive and active. So yes,
it's smart. Do we have a bunch of index tracking etips,
Absolutely we do. Do We also, under the super Life
brand that we're going to change to Smart, have diversified
(15:59):
fund We have those two. You need extra acid alloication
expertise to go into that.
Speaker 2 (16:04):
So give you a little bit more color, give you
a little bit more cost as well, from the sound
of it too.
Speaker 1 (16:08):
Absolutely, but that's where you get the extra expertise. So
we talk about how risk tolerant are you. You might
be conservative or balanced or growth. With that becomes a
pretty global standard way of thinking how you spread your
assets for that. So a balance portfolio pretty traditionally is
sixty percent in equities which are called growth assets forty
(16:30):
percent and bonds or fixed income or defensive stable assets.
That's the worldwide acknowledged. You can chat YOUPT that and
will tell you what your standard asset allocation is.
Speaker 2 (16:40):
Right.
Speaker 1 (16:41):
So from there, right, we've started at the top. We've
got some growth, some stability. That's the balance. But underneath
that you've got asset categories. You've got New Zealand equities,
Australian equities, International, the Europe. You've got fixed income which
comes into your stable. You've also got cash, and increasingly
you've got alternative assets, so you have to look at
those in that. You've got commodities. We've talked about gold
(17:02):
before as a great diversifier. You've got property that's become listed.
Property become really popular and far more standard in terms
of that. So you've got asset categories. Then what you
do as a fund manager and say, right, well, if
those are the core ingredients, what's my strategic acid allocation?
So when I break down the sixty forty, how do
I make that up? And in that zone, we're all
(17:23):
making a decision about where our target waiting is in
any of those asset categories and what our range is.
So you set that'll be in the SIPO and that's
what you're set with. But then within that you have
tactical plays. So even though you might be labeled a
passive fund manager, when you're buying a diversified fund that's
growth or balanced, we're all making conscious choices around acid allocation.
(17:49):
So here it's smart when we choose our diversified fund,
we will build that up with index tracking building blocks
because we think that those are tracking the market and
are a good lower cost alternative. So that's how we
build it, but we still need to put that together
and know how our acid allocation looks. If you're an
active fund manager, you've got the same acid allocation that
(18:11):
you're working on, but at the lower level of fund,
you might choose instead of having index tracking funds, you
might choose to build it up via active stock selection.
So you're picking individual names, individual companies to build.
Speaker 2 (18:23):
Which is a little bit more intensive but potentially gives
you exposure to greater greater gain but greater losses.
Speaker 1 (18:29):
Well yeah, and so there's a whole lot more onus
there on doing the research, finding the right companies and
doing that. The tricky thing for investors, I think with
a diversified fund is there's no easy benchmark or index,
So there's no global New Zealand based investor balanced risk profile,
there's no index for that. So it's really hard to
compare the performance of our diversified funds. And that's why
(18:52):
it comes into league tables and why people constantly talk
in that space around as your fund performing in the
top quart eye or not, and where does it rank
versus its peers. But when you dig into all of
our sipos, we're all going to be slightly different in
our acid allocation that we've employed and the width of
our ranges and where we can tactically tilt given market conditions.
(19:14):
So we might hold more in cash right now less
than international equities, and we can do that because that's
within an acid allocation guideline rather than very specifically having
to track to. There's no global common standard of what
a diversified fund should look like.
Speaker 2 (19:29):
So does that mean that some of the umpires were
used to for this game? The spever or MJW, the
people that produce tables that rate the performance of various funds,
are kind of only part of the picture. They're not
going to give you a really solid answer thereon where
to look to put your mind.
Speaker 1 (19:47):
So they can tell you because you will over time,
you know, and you look at the one year, the
three year, the five year, the ten year returns, which
tell you how much consistency there is, and that group
of professionals who are managing that fund philosophy that they're employing.
So those are really useful tools, but you're comparing things
most of the time with the same name on them.
When you dig into the detail, you might find that
(20:10):
someone's target waiting is fifty five percent for international equities,
but someone else's might be seventy five. They're still going
to be within a range. But that's already where you
can see differences, and that's the manager's call about where
where you weight the asset allocations, the asset categories, and
how you employ your view of the world and the
(20:32):
economics and that.
Speaker 2 (20:33):
So that's some of the fine print. There's an investor
you need to be reading before we can which one to.
Speaker 1 (20:38):
And sometimes that's hard, which is why I think we've
gone with the league tables, which are an excellent tool.
But if you want to choose any of the balanced
funds on the street to then go in it will
talk about it's trying to replicate the benchmark of global say,
but you have to really dig in to find if
they got the waitings in there. And most of the
time you'll find that it's a composite index. So as
(20:59):
I said, there's no kind of SMP. You pick it
off the shelf and that's the standard. So you have
to go into that and most of us will have
put together our composite index with maybe the MASCI world.
Some of New Zealand's the Index fifty because this is
where we live and this is the economy that our
investors are living within. There'll be some Australia because it's
close in our geographic but you'll have a ninety day
(21:20):
bank bill, say for the cash return that you're trying
to beat, or a corporate bond index. So we're putting
together a bunch of indexes to reflect what we're trying
to achieve with that fund in a holistic, diversified portfolio
for round investors.
Speaker 2 (21:36):
We were talking a bit about themes previously and how
different ETFs express different themes and how passive can still
catch some of those themes. Are there any untapped themes
out there or are there any really strong themes that
you think are going to continue through this sit a
period of volatility.
Speaker 1 (21:51):
It's a good question because as a product manufacturer, particularly
of index tracking funds, you try and do that very
much on an investor demand basis. So that's part of
the res and why we partnered with I Shares by
black Rock because that's a big global ETF manufacturer and
they're exposed to a global investing public, so we can
look to them to see what has been of real
(22:12):
interest globally, where that investor bases come from or that
level of interest, and how we do that in terms
of the evolution of our fund size. Here is one
of the things that we can do first is we
can wrap one of I shares offshore funds, so we
list that here on the inside X as a local
pie so that people can get the benefit of the
(22:34):
local twenty eight percent tax rather than worrying about an
offshore holding. And we can start with just wrapping an
I shares fund. When that gets to size, we may
well unwrap that and go and look to hold the
constituents ourselves because you get more tax efficiency its size,
and it's a better way to deliver value to the
end investor. But that's a great way for us to
(22:56):
see what global trend's going on and what might be
of interest.
Speaker 2 (23:00):
Of funds under management and passive rather than active in
the strict sense.
Speaker 1 (23:04):
So that's a really hard one to do in New
Zealand because I think, as they talked about those diversified,
which pocket do you put them in? So do you
tag that by a fund manager? But that's not necessarily
the key component. So we in New Zealand, he compared
to We've did some research last year around Australia. We
have far less in index tracking funds than Australia does,
(23:25):
and that's far less again than America. Say so, I
think that's a little bit of that sophistication journey. Lots
of our New Zealand investing public are still buying their
coffee black or white because that is how you get
into the market, and it's a safe way because you're
putting your diversification in the hands of a professional. But
as that investing public gets more sophisticated and has more views,
(23:45):
people are looking to unpack that and actually have the
opportunity to pick the building blocks and the components themselves.
And one of the easiest ways to do that on
a component basis where you just want slices of market
are ETFs and index tracking funds because a lot of
your fund managers, so a professional active fund manager isn't
(24:06):
going to offer those index tracking components because their job
is to put them together in a package that outperforms
the market. So you can see that level of interest,
particularly from retail investors, and you can see in America
quite often if in my previous background we worked at
wealth management. You would see American investors coming over and
their entire portfolio would be made up of index tracking ittifs,
(24:28):
because that's how they thought in that market they got
value for money and that they were able to express
themes in there without worrying that they had packaged it
all up for someone else in a fund. Australia's ahead
of us. New Zealand's getting there, and I think it
will be quite some time because lots of people will
still want black a white coffee.
Speaker 2 (24:46):
So some people are still just sticking black and white.
Speaker 1 (24:50):
Yeah, they are, and I think that's totally fine because
you should do what's right for your level of expertise,
your risk tolerance, your investment profile. But even in that
where we have an active fund manager ourselves, and there
is a lot of others in the street, they may
well use an index tracking fund as well, so it's
not just a retail play in a way to build
a portfolio. ETFs and that's why you've seen them grow
(25:12):
so much around the world because they've become a tool
in the toolbox of huge fund managers, pension schemes, etc.
Because that is a great way to get a slice
of the market and to track that return.
Speaker 2 (25:25):
Given that huge amount of growth and how there's this
massive sort of momentum building up in the market, all
that passive money, which as it flows into a market
tends to reflect the bigger and bigger players. Does it
sort of become a bit of a self fulfilling prophecy,
Like the Magnificence even aren't just getting bigger in that
index because of the performance and fundamentals of the company,
(25:48):
it's simply because there's so much passive money flowing in.
Is through a way to work out if that's happening.
Speaker 1 (25:53):
For me personally. I think there's two aspects. One is,
as an investing public, we're all buying shares in a company.
That money doesn't go to directly to the company to
invest The company has to stand on its own two
feet in terms of the economics of it. So the
Magnificence seven are they driven by retail demand and a look,
it is informative and people are interested in that investment
(26:14):
and they're going to follow and track those indices. So
a lot of those passive fund managers, yes, that's going
to have an impact, But the underlying fundamentals of how
Amazon is going to do as a business or how
Navidio is really comes down to what their core fundamentals
of their business are. What is their supply chain, how
big is their moat, Where are they selling product to,
what priced? What's their margin? Who are the people running it,
(26:38):
what's their long term strategy for the company. So the
big company is going to stand on its own economics
and fundamentals. It's going to drop in and out of
an index, ay the top ten or the top twenty,
based on the economics of it. Because the index provider
has a methodology and it doesn't look at volume of
trading flow. It looks at what the capitalization are, what's
(26:58):
the waiting So they have very satisfiic sticated methods. What
it does mean is that when those changes happen, they
hurt or benefit that company more because there may be
we'll be more trading activity off the back of that
than if it had just been we increased our earnings guidance,
or we had a poor year. So those kind of
things I think it highlights and probably magnifies as the
(27:20):
word I'm looking for in terms of how that change
happens versus the people who have just actively chosen the stock,
because if a company goes down in terms of market
capitalization or it has a really bad earnings year, your
active fund managers are still going to be in the
analysis of the stock. They're going to have a conviction
whether they think that was a blip or a long
term Do they want to reduce their holding or stay
(27:41):
the course, do they want to sell out completely? So
those are all choices that happen in the investing market. Anyway.
If you're in a passive fund or an index tracking,
you're going to be driven by what the method is.
And if it's downweighthed and now it's this much smaller
part of that index, then everyone's going to hold a
much smaller amount. So it does magnify that fascinating.
Speaker 2 (28:01):
I think I've learned a lot more about passive and
how it's a little bit more active, perhaps than some
of us thought.
Speaker 1 (28:07):
When we put together those diversified funds. That's exactly what
it is, and I think it's the delayering for me.
When I talk to people, you know, you have to
what is the objective of the fund? And that's the
first part to check out, So do you know what
the fund's job is that's the first thing. And when
it's doing that job, how do you know if it's
doing a good job or not. Well, that's what the
benchmark's job is to do. It's to tell you whether
(28:28):
that person is truly mirroring that chosen benchmark or it's
outperforming it. So you've got to get down to those
fundamentals to truly understand what the purpose of your fund is.
And some of it's nice and clean and easy. As
we said with the ETFs, it says it on the
tin and that's our job. I am tracking the US
five hundred, or I am in healthcare, or I am
in listed property, super easy. But you're going to be
(28:48):
in the building block component of those. If you're talking
about index tracking funds, you can put them together yourself,
or you can have someone in the investment professional community
put them together for you. That's when you start layering
and what your tactical and your state strategic as allocation
is and what that view is of where you want
to be positioned in terms of your risk profile and
your volatility.
Speaker 2 (29:07):
Easy, thank you and nothing passive at all about you,
and thank you if you're watching us on YouTube or
listening on spotify, Apple Podcasts or iHeart or Hot off
the Chasis app. Make sure you lock in for this
episode and that other one on the active perspective, and
all of the other insights that you'll find on Shared
Lunch courd Metu. That's us for now,
We do get a lot more queries during times of volativity.
Lots of people do what we call panic selling, and
that is that emotional reaction to oh my god, it
might lose more money, so I should sell it now
and cut my losses. Yes, you're cutting your losses, but
you're also crystallizing those losses. Key we Savor in New
Zealand has really grown this area of interest in a
diversified fund so that has brought a new complexity in
(00:23):
New Zealand. We have far less in index tracking funds
than Australia does, and that's far less again than America.
Say so, I think that's a little bit of that
sophistication journey.
Speaker 2 (00:37):
Kirakoto, Welcome to Shared Lunch. I'm Garth Bray. Active investing
picking what to buy, sell and the hold, and the
passive approach tracking the market, buying the momentum. They both
have their fans and their flaws. We are talking to
fund managers about both approaches and today I'm with Anna Scott,
the CEO of Smart to talk about that passes perspective.
(01:00):
We've also been speaking to an active fund manager, so
I consider this as the second half of that match.
But before you get into any of that. Here's some
important information you should always consider before investing.
Speaker 3 (01:12):
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 (01:26):
Hello Anna, good morning. You are running a series of
passive funds, aren't you. Yes, so you're probably the best
person to ask what is your definition of what passive
investing really means?
Speaker 1 (01:39):
Very good question, because I get asked this quite a lot,
and I think we try and sometimes get caught up
in that passive versus active debate. And I'm a big
believer in actually and you need a bit of both
for that. But yes, we do have a passive series
of funds. So when you think about what does a
fund do, the first thing you start with is what's
the objective of the fund? Now you can go and
read the pds to get that, but objectives and the
(02:00):
words that come with that talk about if you're going
to be passive, they will talk about match or replicate
or mirror. So their job is to track an index.
If you're in an active fund, it might say something
like beat or outperform. So the first thing is what's
your objective of your fund? And so a passive fund
or an index tracking fund is one that does exactly that,
(02:21):
it tracks an index. Then the next thing is, well,
what is the index that that fund is meant to
track or beat? So what is the benchmark? And when
you get into that, that isn't something that is determined
necessarily by us as a fund manager. There are a
bunch of companies who are index providers out in the market.
So you might have heard of SMP or MSCI, Bloomberg,
(02:41):
Fltsy do them and they create an index that reflects
a market. And most of the time those are market
tracking funds. That's the most common area, which means that
you're not in a diversified fund, but you've particularly chosen
a market.
Speaker 2 (02:55):
It sounds like a beguilingly simple idea. It's one that's
been around for a long time, or is this more
of a recent rise that we've seen.
Speaker 1 (03:02):
It's been around for a long time, But I think
that perhaps in the evolution or the sophistication of time,
ETFs have really brought those to the four because they're
listed on markets around the world. They're listed in those
market tracking component parts, rather than probably at the beginning
of funds when they were unlisted or a managed fund.
Lots of times those were hedge funds or a diversified
(03:25):
fund with an active manager. So now we're getting into
the component parts. I like to think of it actually
as everyone's sophistication level. It's a little bit like the
coffee drinker's journey. So at the beginning, and particularly in
New Zealand, if you go back, say five ten years,
you had two choices for coffee. It was black or
it was white. Maybe we then got onto the decaf
and now people have choices where they might have their
(03:46):
double shot trim flat latte, or you might have oat milk,
or you really want your beans to have been come
from Brazil. So we've got a lot more choice. And
I think that's the same as the investing public. There's
more choice there.
Speaker 2 (03:59):
I'm not sure where high class poor over fits into
that analogy, but I get what you're talking about that
there's an increasing kind of sophistication to the products and
so on. I mean, we know that the chezy's client
base and audience really are into those. What brought those about,
when did they first sort of emerge and what have
they enabled.
Speaker 1 (04:17):
So at the very beginning, you could only trade if
you had a broker, and that was a physical person,
right who traded on the exchange. That's become far more electronic.
We've seen the growth of online trading platforms and we've
seen that follow the global trend to where real everyday
people retail we call them in the investing market. Retail
customers want to get involved and diversify their own assets.
(04:39):
Because you think about the evolution of New Zealand. You
might have known about property, right we start and we
grow up on that the physical property that we live
in or maybe we rent out. Now we're diversifying. So
we talked about cash, and people knew about term deposits,
and then they knew about bonds and now equities and
it's an extension of that. So rather than go to
the share market and decide I'm going to select these
(05:00):
two stocks myself because I think they're going to be
winners on the long term, actually I can buy a
basket of those stocks. So the most common example that
we give is the US five hundred, because there's a
lot of interest in that as the biggest economy and
biggest market in the world. So when we create an
index tracking fund for the US five hundred, we are
giving the opportunity to track that market. So our job
(05:23):
is to mirror, to replicate, to give you the same
returns that that market would give you. But there's five
hundred stocks in that index. That's why it's called the
US five hundred. And when you do that, how do
you know which ones of those are going to be
the best performing or not. So a lot of people
like the idea that you are actually just getting the
returns of that market. So an index provider puts them
together with the waitings. They specify what those waitings are
(05:46):
and the proportion of those stocks within that, and then
our job as the fund manager is to buy each
of those five hundred stocks in the waiting to match
that that the index provider specifies. So our job is
to hold all five hundred in the same waiting to
give that investor the same return as if they were
doing that themselves, and the same return as that whole market.
Speaker 2 (06:08):
So if you're doing that in the S and P
five hundred, then like a third of that shareholding that
you've got to reflect that index is going to be
the Big seven, and then if there are movements there,
you're going to have to try and match those. Not
so much in real time, but you're catching up here. Yeah.
Speaker 1 (06:25):
Our job is the index provider will on a schedule,
most of them are quarterly, will specify that they will
rewait or rebalance the index, and so our job is
to match that. So every quarter you'll hear that talk
in the market about oh it's the rebalance week, and
a lot of movement and trading will go on in
index tracking fund managers because our job is to make
(06:46):
sure that when the index provider specifies that there's been
changes in market capitalization and value in the market and
they've reweighted all those companies, our job is to make
sure that our holding matches that.
Speaker 2 (06:58):
Waiting Again, it sounds a bit like football, like you know,
the English Premier League. You get sort of relegation or promotion.
You're either on the top of the table or you've
dropped off for whatever reason. Your performance as a company
doesn't entitle you to be in that bracket. As you say,
that happens like quarterly. Usually I know that there was
a rebalance. I think for a couple of the New
Zealand indexes end of last week or so on, YEP.
(07:21):
So you had, let's take a company, for example, Ryman
dropped out of the top ten yep and A two
jumped in there. But there would have been a lot
of change happened before that decision, and there's potentially a
bit of value that's gone missing. Is this the bit
that you have to just accept You don't get if
(07:41):
you are in a passive fund that you're going to
be catching up.
Speaker 1 (07:45):
So it comes back to what's your goals? Right in
index tracking funds, So in that debate about should you
be with a passive manager or an active manager, index
tracking funds are tracking a market, so you can decide
which slice of that market you can be US five hundred,
the ASX two hundred, emerging markets, Asia, Pacific, robotics and automation.
They're all slices of a market, and you're choosing the
(08:07):
market that you wish to be tracking the performance on.
And most of the time that's a long term play
because if you want to get the value of the
instex ten, say, over your investment horizon, then you're wanting
that whole market return over that horizon, whether there's a
little bit of lost value and one quarterly rebalanced cycle
(08:28):
because someone dropped out and someone Elstrup came in, and
you need to pay the cost of it in the
fund fee. Right, you're not paying additional to that, but
the fund cost of doing that trading in the long term,
that's not really part of the objective of the fund.
Forget what I mean. You know, if you're if you're
investing for twenty years until retirement, then when you're choosing
(08:50):
a fund manager, you're really saying, well, do I think
that the US five hundred over twenty years is going
to perform better or worse than an active fund manager
with specific portfolio managers and people making stock selections. And
that's why there's a lot of trend or data that
talks about long term investing horizons the market will be
(09:11):
to person, twenty years is a long time for the
same portfolio managers to sit there and manage that fund
in the same way and beat the market every single year.
And that's where you get that kind of passive because
it's about market growth and long term market growth versus
individual people stock picking. But that's a long term play.
If you're investing for a two year time horizon, you
might choose a particularly well performing fund with some massive
(09:33):
managers or folio managers who you think are really focused
on that, and you're not going to be worried about
whether the New Zealand twenty is going to be up
or down in two years time.
Speaker 2 (09:44):
We're in an error of volatility. Does that give a
preference one way or the other. Does it say, hey,
now's a good time to be looking at the noise
and trying to screen that out and go passive, or
is it, hey, you actually need to think about active
management to try and take advantage of that to deal
with stuff coming in much more quickly, news coming in
(10:04):
much more quickly. Change is happening much more quickly.
Speaker 1 (10:07):
So I believe in a bit of both. What about
in times of volatiley again, how long you're investing for?
What is your goal with that investment? So if I
was in Key with Saver and I think I want
to buy a house in the next year, well that
means that my risk tolerance ride is lower right now
because I don't want to be able to want to
take my money out at a downturn in the economy,
(10:29):
So it's about the diversification of where you're invested. And
we see, particularly in charesis when we look at the
top six ETFs that people are trading there, we can
see that people are actually building a portfolio. So in
that top six we have the US five hundred, the
NZD X fifty, the ASX twenty. Actually we have Asia
Pacific emerging markets. So actually we can see that people
(10:52):
are spreading their investment around the globe and around different
markets to try and smooth out that volatility.
Speaker 2 (10:59):
Is that the respectants to the flux that you're seeing
is that a lot of people are just going, Hey,
I'm just going to tune the noise out and I'm
going to go for the ride and work out that
twenty years from now to be fine. Or do you
a mean to you? As fund managers actually hearing from
people panicking and saying what do I do? Yeah?
Speaker 1 (11:15):
Volatility is always really concerning because money is a personal thing, right,
so it's emotional when you look at your balance and
it's down. So we do get a lot more queries
during times of volatilty because the point of being in
a market tracking fund is you're going to track the
performance of the market. So when the US market drops
off four percent overnight, then your value of your fund
(11:37):
holding is also going to do that. The point is
what are you invested for and should that matter? Lots
of people do what we call panic selling, and that
is that emotional reaction to oh my god, it might
lose more money, so I should sell it now and
cut my losses. Yes, you're cutting your losses, but you're
also crystallizing those losses. So if you don't need the
money today, you should hold on because if you look
(11:59):
at the historical trend on a long term basis, markets
largely go and grow. But that's not to say, right,
we always say that previous performance is no indication of future.
Do you really have to be clear about again what
you invested for. It's not the old adage of it.
It's not the timing the market and will you buy
(12:20):
and sell, it's actually time in the market. It's that accumulation,
it's the compounding investment. Those are the things over the
long term if you're saving for retirement that really help out.
Speaker 2 (12:32):
Sure, And I guess a part of that is the
cost of all of that activity and what it's costing
you to take part that's often a football that it's
thrown around. I suppose between the passive and active side, Right,
is that a passive approach you can afford to do
it a little bit more cheaply.
Speaker 1 (12:50):
Yeah, So we talk about the cost yep so the
three p's of fund management and when you look into
a fund to kind of the philosophy of the funds.
We talked about the objective, the process that they run.
So in an index tracking, that is the tracking and
the people who do that. People become far more important
in an active fund because you are actually selecting stocks
(13:11):
and in within that fund you have different objectives as well. Right,
you're trying to outperform or beat, but it's a particular
market you're trying to outperform. But when we look at
the costs over all of those, both of us, in
terms of all those types of funds, are paying an
index provider for an index. Some of those indexes are
more expensive and more esoteric than others, but you've got
that cost both sets trading. So you're going to rebalance,
(13:33):
or you're going to choose stocks that you no longer
like and think have value, or depending on the feature
of your fund, you might be volatility trading fund or
looking for cheapness versus long term value. But you're going
to make different selections and choices, so you're both going
to trade on that. Where it comes into the underlying
cost and where you traditionally see that an index tracking
fund would have a cheaper management fee is the cost
(13:54):
of research and the cost of people. Because if you
are an active fund manager and so you are pouring
over stocks and selecting those based on your own philosophy,
then that is a labor intensive job. You need more
research analysts in that team. You need to pay for
more research to get into what those companies' analytics are.
And you have a market professional who is a conviction
(14:17):
led stock picker, right, and that's not everyone's cup of tea.
There's a lot of nights that you don't sleep with
that when you've got a position on. So that is
inherently a more expensive fund to run for research and
expertise and number of people that you need in your
team versus a pure index tracking fund isn't going to
need that research because the job is to get the
(14:38):
index provider's information and weight your portfolio in line with that.
Speaker 2 (14:43):
I think someone we spoke to recently said it's the
difference between professional football and more social league football. Is
that an unfair comparison.
Speaker 1 (14:51):
There's probably a little unfair, but I think they just
so if we come back to the philosophy, they're very
different philosophies. You have a different job function in each
of those and if you're in a restaurant, say that's
a difference between being the sou chef or in charge
of the vegetable plating versus the overall headshift who's putting
together a whole menu. They're different jobs. And one thing
I think that we think about when we think about
(15:13):
active and passive is and this is why I continue
to talk about index tracking, because if there's an index
in a market, then that's what you're doing. In a
passive fund, that's your job right to replicate. In mirror key,
we Savor in New Zealand has really grown this area
of interest in a diversified fund. So that has brought
in new complexity. When you get into a diversified fund, anybody,
(15:37):
regardless of whether you're using index tracking, building blocks or
stock selection, you're making a active choice on how you
build that diversified fund. And so that's where the line.
I think that blurs between passive and active. So yes,
it's smart. Do we have a bunch of index tracking etips,
Absolutely we do. Do We also, under the super Life
brand that we're going to change to Smart, have diversified
(15:59):
fund We have those two. You need extra acid alloication
expertise to go into that.
Speaker 2 (16:04):
So give you a little bit more color, give you
a little bit more cost as well, from the sound
of it too.
Speaker 1 (16:08):
Absolutely, but that's where you get the extra expertise. So
we talk about how risk tolerant are you. You might
be conservative or balanced or growth. With that becomes a
pretty global standard way of thinking how you spread your
assets for that. So a balance portfolio pretty traditionally is
sixty percent in equities which are called growth assets forty
(16:30):
percent and bonds or fixed income or defensive stable assets.
That's the worldwide acknowledged. You can chat YOUPT that and
will tell you what your standard asset allocation is.
Speaker 2 (16:40):
Right.
Speaker 1 (16:41):
So from there, right, we've started at the top. We've
got some growth, some stability. That's the balance. But underneath
that you've got asset categories. You've got New Zealand equities,
Australian equities, International, the Europe. You've got fixed income which
comes into your stable. You've also got cash, and increasingly
you've got alternative assets, so you have to look at
those in that. You've got commodities. We've talked about gold
(17:02):
before as a great diversifier. You've got property that's become listed.
Property become really popular and far more standard in terms
of that. So you've got asset categories. Then what you
do as a fund manager and say, right, well, if
those are the core ingredients, what's my strategic acid allocation?
So when I break down the sixty forty, how do
I make that up? And in that zone, we're all
(17:23):
making a decision about where our target waiting is in
any of those asset categories and what our range is.
So you set that'll be in the SIPO and that's
what you're set with. But then within that you have
tactical plays. So even though you might be labeled a
passive fund manager, when you're buying a diversified fund that's
growth or balanced, we're all making conscious choices around acid allocation.
(17:49):
So here it's smart when we choose our diversified fund,
we will build that up with index tracking building blocks
because we think that those are tracking the market and
are a good lower cost alternative. So that's how we
build it, but we still need to put that together
and know how our acid allocation looks. If you're an
active fund manager, you've got the same acid allocation that
(18:11):
you're working on, but at the lower level of fund,
you might choose instead of having index tracking funds, you
might choose to build it up via active stock selection.
So you're picking individual names, individual companies to build.
Speaker 2 (18:23):
Which is a little bit more intensive but potentially gives
you exposure to greater greater gain but greater losses.
Speaker 1 (18:29):
Well yeah, and so there's a whole lot more onus
there on doing the research, finding the right companies and
doing that. The tricky thing for investors, I think with
a diversified fund is there's no easy benchmark or index,
So there's no global New Zealand based investor balanced risk profile,
there's no index for that. So it's really hard to
compare the performance of our diversified funds. And that's why
(18:52):
it comes into league tables and why people constantly talk
in that space around as your fund performing in the
top quart eye or not, and where does it rank
versus its peers. But when you dig into all of
our sipos, we're all going to be slightly different in
our acid allocation that we've employed and the width of
our ranges and where we can tactically tilt given market conditions.
(19:14):
So we might hold more in cash right now less
than international equities, and we can do that because that's
within an acid allocation guideline rather than very specifically having
to track to. There's no global common standard of what
a diversified fund should look like.
Speaker 2 (19:29):
So does that mean that some of the umpires were
used to for this game? The spever or MJW, the
people that produce tables that rate the performance of various funds,
are kind of only part of the picture. They're not
going to give you a really solid answer thereon where
to look to put your mind.
Speaker 1 (19:47):
So they can tell you because you will over time,
you know, and you look at the one year, the
three year, the five year, the ten year returns, which
tell you how much consistency there is, and that group
of professionals who are managing that fund philosophy that they're employing.
So those are really useful tools, but you're comparing things
most of the time with the same name on them.
When you dig into the detail, you might find that
(20:10):
someone's target waiting is fifty five percent for international equities,
but someone else's might be seventy five. They're still going
to be within a range. But that's already where you
can see differences, and that's the manager's call about where
where you weight the asset allocations, the asset categories, and
how you employ your view of the world and the
(20:32):
economics and that.
Speaker 2 (20:33):
So that's some of the fine print. There's an investor
you need to be reading before we can which one to.
Speaker 1 (20:38):
And sometimes that's hard, which is why I think we've
gone with the league tables, which are an excellent tool.
But if you want to choose any of the balanced
funds on the street to then go in it will
talk about it's trying to replicate the benchmark of global say,
but you have to really dig in to find if
they got the waitings in there. And most of the
time you'll find that it's a composite index. So as
(20:59):
I said, there's no kind of SMP. You pick it
off the shelf and that's the standard. So you have
to go into that and most of us will have
put together our composite index with maybe the MASCI world.
Some of New Zealand's the Index fifty because this is
where we live and this is the economy that our
investors are living within. There'll be some Australia because it's
close in our geographic but you'll have a ninety day
(21:20):
bank bill, say for the cash return that you're trying
to beat, or a corporate bond index. So we're putting
together a bunch of indexes to reflect what we're trying
to achieve with that fund in a holistic, diversified portfolio
for round investors.
Speaker 2 (21:36):
We were talking a bit about themes previously and how
different ETFs express different themes and how passive can still
catch some of those themes. Are there any untapped themes
out there or are there any really strong themes that
you think are going to continue through this sit a
period of volatility.
Speaker 1 (21:51):
It's a good question because as a product manufacturer, particularly
of index tracking funds, you try and do that very
much on an investor demand basis. So that's part of
the res and why we partnered with I Shares by
black Rock because that's a big global ETF manufacturer and
they're exposed to a global investing public, so we can
look to them to see what has been of real
(22:12):
interest globally, where that investor bases come from or that
level of interest, and how we do that in terms
of the evolution of our fund size. Here is one
of the things that we can do first is we
can wrap one of I shares offshore funds, so we
list that here on the inside X as a local
pie so that people can get the benefit of the
(22:34):
local twenty eight percent tax rather than worrying about an
offshore holding. And we can start with just wrapping an
I shares fund. When that gets to size, we may
well unwrap that and go and look to hold the
constituents ourselves because you get more tax efficiency its size,
and it's a better way to deliver value to the
end investor. But that's a great way for us to
(22:56):
see what global trend's going on and what might be
of interest.
Speaker 2 (23:00):
Of funds under management and passive rather than active in
the strict sense.
Speaker 1 (23:04):
So that's a really hard one to do in New
Zealand because I think, as they talked about those diversified,
which pocket do you put them in? So do you
tag that by a fund manager? But that's not necessarily
the key component. So we in New Zealand, he compared
to We've did some research last year around Australia. We
have far less in index tracking funds than Australia does,
(23:25):
and that's far less again than America. Say so, I
think that's a little bit of that sophistication journey. Lots
of our New Zealand investing public are still buying their
coffee black or white because that is how you get
into the market, and it's a safe way because you're
putting your diversification in the hands of a professional. But
as that investing public gets more sophisticated and has more views,
(23:45):
people are looking to unpack that and actually have the
opportunity to pick the building blocks and the components themselves.
And one of the easiest ways to do that on
a component basis where you just want slices of market
are ETFs and index tracking funds because a lot of
your fund managers, so a professional active fund manager isn't
(24:06):
going to offer those index tracking components because their job
is to put them together in a package that outperforms
the market. So you can see that level of interest,
particularly from retail investors, and you can see in America
quite often if in my previous background we worked at
wealth management. You would see American investors coming over and
their entire portfolio would be made up of index tracking ittifs,
(24:28):
because that's how they thought in that market they got
value for money and that they were able to express
themes in there without worrying that they had packaged it
all up for someone else in a fund. Australia's ahead
of us. New Zealand's getting there, and I think it
will be quite some time because lots of people will
still want black a white coffee.
Speaker 2 (24:46):
So some people are still just sticking black and white.
Speaker 1 (24:50):
Yeah, they are, and I think that's totally fine because
you should do what's right for your level of expertise,
your risk tolerance, your investment profile. But even in that
where we have an active fund manager ourselves, and there
is a lot of others in the street, they may
well use an index tracking fund as well, so it's
not just a retail play in a way to build
a portfolio. ETFs and that's why you've seen them grow
(25:12):
so much around the world because they've become a tool
in the toolbox of huge fund managers, pension schemes, etc.
Because that is a great way to get a slice
of the market and to track that return.
Speaker 2 (25:25):
Given that huge amount of growth and how there's this
massive sort of momentum building up in the market, all
that passive money, which as it flows into a market
tends to reflect the bigger and bigger players. Does it
sort of become a bit of a self fulfilling prophecy,
Like the Magnificence even aren't just getting bigger in that
index because of the performance and fundamentals of the company,
(25:48):
it's simply because there's so much passive money flowing in.
Is through a way to work out if that's happening.
Speaker 1 (25:53):
For me personally. I think there's two aspects. One is,
as an investing public, we're all buying shares in a company.
That money doesn't go to directly to the company to
invest The company has to stand on its own two
feet in terms of the economics of it. So the
Magnificence seven are they driven by retail demand and a look,
it is informative and people are interested in that investment
(26:14):
and they're going to follow and track those indices. So
a lot of those passive fund managers, yes, that's going
to have an impact, But the underlying fundamentals of how
Amazon is going to do as a business or how
Navidio is really comes down to what their core fundamentals
of their business are. What is their supply chain, how
big is their moat, Where are they selling product to,
what priced? What's their margin? Who are the people running it,
(26:38):
what's their long term strategy for the company. So the
big company is going to stand on its own economics
and fundamentals. It's going to drop in and out of
an index, ay the top ten or the top twenty,
based on the economics of it. Because the index provider
has a methodology and it doesn't look at volume of
trading flow. It looks at what the capitalization are, what's
(26:58):
the waiting So they have very satisfiic sticated methods. What
it does mean is that when those changes happen, they
hurt or benefit that company more because there may be
we'll be more trading activity off the back of that
than if it had just been we increased our earnings guidance,
or we had a poor year. So those kind of
things I think it highlights and probably magnifies as the
(27:20):
word I'm looking for in terms of how that change
happens versus the people who have just actively chosen the stock,
because if a company goes down in terms of market
capitalization or it has a really bad earnings year, your
active fund managers are still going to be in the
analysis of the stock. They're going to have a conviction
whether they think that was a blip or a long
term Do they want to reduce their holding or stay
(27:41):
the course, do they want to sell out completely? So
those are all choices that happen in the investing market. Anyway.
If you're in a passive fund or an index tracking,
you're going to be driven by what the method is.
And if it's downweighthed and now it's this much smaller
part of that index, then everyone's going to hold a
much smaller amount. So it does magnify that fascinating.
Speaker 2 (28:01):
I think I've learned a lot more about passive and
how it's a little bit more active, perhaps than some
of us thought.
Speaker 1 (28:07):
When we put together those diversified funds. That's exactly what
it is, and I think it's the delayering for me.
When I talk to people, you know, you have to
what is the objective of the fund? And that's the
first part to check out, So do you know what
the fund's job is that's the first thing. And when
it's doing that job, how do you know if it's
doing a good job or not. Well, that's what the
benchmark's job is to do. It's to tell you whether
(28:28):
that person is truly mirroring that chosen benchmark or it's
outperforming it. So you've got to get down to those
fundamentals to truly understand what the purpose of your fund is.
And some of it's nice and clean and easy. As
we said with the ETFs, it says it on the
tin and that's our job. I am tracking the US
five hundred, or I am in healthcare, or I am
in listed property, super easy. But you're going to be
(28:48):
in the building block component of those. If you're talking
about index tracking funds, you can put them together yourself,
or you can have someone in the investment professional community
put them together for you. That's when you start layering
and what your tactical and your state strategic as allocation
is and what that view is of where you want
to be positioned in terms of your risk profile and
your volatility.
Speaker 2 (29:07):
Easy, thank you and nothing passive at all about you,
and thank you if you're watching us on YouTube or
listening on spotify, Apple Podcasts or iHeart or Hot off
the Chasis app. Make sure you lock in for this
episode and that other one on the active perspective, and
all of the other insights that you'll find on Shared
Lunch courd Metu. That's us for now,
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