For many investors, their preferred investment style is via passive, index tracking funds.  Passive funds are typically characterised by low management fees, as the funds automatically hold all of the shares within the particular index they track, and don’t need to employ a fund manager/research team to pick stocks that they believe will outperform (this is the domain of Active funds).  Hence the management costs for Passive funds are low compared with Active funds – a significant advantage they hold (for a more detailed look at Active v Passive funds, see my earlier blog post here).

For Passive investors investing in NZ equities, until recently the only choice available (outside of KiwiSaver) was via SmartShares, which offer a range of funds including the NZ Top 50 Fund which, as the name suggests, invests in the 50 biggest NZ companies.  The management fee is 0.5%.

However this position has changed recently, with KiwiSaver/investment fund provider Simplicity introducing the NZ Share Fund.  This also invests in the top 50 NZ listed companies, but significantly, the management fee is a mere 0.1% – one fifth of the fee charged by SmartShares.

On the surface favouring the Simplicity fund looks like a no-brainer.  However, there are some important differences in the two offerings worth noting:

  • The SmartShares fund has a 5% cap on any individual stock, the Simplicity fund doesn’t.  SmartShares argues that the performance of the “capped” index has been better than the uncapped index by 0.63% pa over the last 10 years.
  • For SmartShares, investors can choose to have dividends paid in cash.  For Simplicity, dividends are reinvested.
  • The minimum investment is $250 for SmartShares, $10,000 for Simplicity.

What is my view?

One of reasons I have favoured (good) Active fund managers for NZ investments is that the management fee of the SmartShares passive funds is too high and does not provide a significant enough cost advantage over the (good) Active fund managers.  The Simplicity offering with its 0.1% fee is much more in line with overseas passive fund costs.  It will be interesting to see how SmartShares responds, and if they lower their fees. 

As it stands today, I favour Simplicity over Smartshares for NZ passive investments in the top 50 NZ companies (assuming the investor has the $10k minimum).  The ability to have dividends paid in cash with SmartShares is nice, but of secondary importance.  And I’m not sold by the historical outperformance of the 5% stock cap (this doesn’t mean the capped fund will outperform over the next 10 years).    

As they have done with KiwiSaver, it’s great to see Simplicity also entering the NZ passive investment market, and giving it a good shake up!

 

Dean Edwards

 

Note: I am a fully independent Financial Adviser and do not receive any commissions, payments or incentives from any product providers.

 

Comparing NZ passive funds

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