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Aussie allocation creeps up among NZ managers

Analysis

Local equities fund shops have increasingly allocated to Australian shares over the last four years, a new Mercer NZ analysis has found, partly to ease pressure from ballooning assets under management.

The Mercer study of a dozen NZ fund managers found Australian shares now represent 34 per cent of their collective portfolios compared to 26 per cent just four years ago.

In fact, the Australian equities component of the local manager cohort monitored by Mercer was up almost 250 per cent over the four-year period to reach about $9 billion while NZ share holdings rose 70 per cent to $17 billion by 2021.

  • David Scobie, Mercer NZ head of consulting, said at least one manager in the study allocates more to Australian equities than home-based shares.

    A single NZ manager now owns 40 per cent of the group’s total Australian share exposure, the report shows, compared to 28 per cent for an unnamed firm in a similar 2017 analysis.

    The reweighting to the Australian market followed a period of strong returns on both sides of the Tasman (although the NZX has outperformed over the decade) and increasing flows from KiwiSaver schemes.

    According to the Mercer analysis, five managers hold 1 per cent or more of the total S&P/NZX 50 index by market cap – a figure unchanged from 2017.

    “Managing more than 1% of market cap is rare by international standards, especially in relatively illiquid/narrow markets,” the report says. “Across the Tasman, firms typically manage 0.25-0.75% in Broad Cap Australian Equities (none over 1%) and less than 0.25-0.5% in Small/Mid Caps.”

    However, Scobie said while the NZ situation might be unique, owning 1 per cent or more of the market was not “inherently wrong” if managers continue to generate outperformance.

    As well, he said market ownership was a “blunt” measure of capacity limits with other factors such as active trading strategies coming into play.

    “Capacity is more nuanced than just the amount of funds under management compared to the benchmark,” Scobie said.

    In spite of the rapid growth in assets under management, since 2011 Mercer has added just one NZ firm to its monitoring universe, which excludes government-owned and passive operations.

    The report says start-up local share managers face some barriers to entry such as high compliance costs and the capacity constraints of the sector as a whole.

    However, Scobie said there was a fine line between growing assets large enough to generate sustainable business income and hitting capacity limits.

    Mercer also found of nine ‘core’ NZ strategies under review, only three scored ‘fairly good’ or ‘strong’ returns above benchmark over a recent three-year period. But during the nine years to 2021 the performance record was slightly better with four of eight strategies delivering fairly good or strong (above-benchmark by 1.5 per cent or 2.5 per cent per annum, respectively) returns: three strategies returned 0.5 per cent or less and may not have covered the cost of fees compared to the index.

    Scobie said the Mercer study is part of its regular review of the local funds management sector designed to track those firms it already allocates to and identify potential promising alternatives.

    Currently, the Mercer NZ shares multi-manager fund uses Devon, Harbour and a smaller allocation to index player, the NZX-owned Smartshares.

    The study covered: ANZ; Aspiring; Castle Point; Devon; Fisher Funds; Harbour; Milford; Mint; Nikko; Pie Funds; QuayStreet; and Salt.




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