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
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.
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 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.
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.
Welcome, Hi, Welcome to shared lunch.
Thank you for having me Gar.
Look, when we talk about active investing, is it literally just the art of picking winners?
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, 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 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 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.
And that's where you get the difference.
And that is where active managers truly aim to add performance over the long term.
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?
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 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 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, the right thing for me today is to stay in a growth type asset.
So that sounds like a lot better than a hangover.
Yeah, that's for sure, as far greater outcomes over long time, long term that's.
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.
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 who's running companies, to make picks where we're going to add performance.
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?
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 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.
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.
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 help you make a decision as to whether you should be buying, whether you should be selling, or whether you should be holding.
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?
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 what's really important to be over and close to those companies.
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.
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 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.
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 some big risks to consider. Yeah.
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, 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 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, 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 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 markets and making calls based on real time information. Yeah.
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 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 that doesn't take their ESG commitments seriously or is there still that appetite Like.
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.
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.
So it's very mainstream in that it's.
Becoming far more mainstream.
Absolutely, And on the DEI stuff, that's a little too early to tell.
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 be mainstream.
If you are looking at other themes as an investment manager, what are you looking around and spotting there?
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 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 think drop on the day.
Yeah, massive, like a trillion dollar loss, but.
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.
Whereas a passive manager is just going to track whatever is going on our adjustments accordingly, I guess.
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 together and making sure they've got the best team on the day for those conditions.
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
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.
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, 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, they're just simply tracking it index do.
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.
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 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.
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 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?
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.
Know, in terms of ahead of the returns above above the rutuns passive absolutely.
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.
So what do you think it's particularly in the last couple of years that that's been the case.
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.
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?
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 pretty long term.
You know.
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?
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?
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 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.
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.
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 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 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 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 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.
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.
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.
So haw's the cash count looking at the moment at pipe, I think, look, I think you've got a good war chest.
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.
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.
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 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, and the noise has to be filtered otherwise you kind of drown.
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 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.
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 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 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. 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.
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.
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 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 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 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
nest egg. And that retirement saving nest egg is for you to pay yourself pocket money when no one else is paying you.
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,