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  1. #1
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    Sep 2021
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    Default Active vs Passive funds

    Hello, everything I read says that Active managers rarely beat the market and virtually never over a long term. I understand this and am happy to invest in passive funds for this reason.
    However, many NZ Active funds seem to defy this. For example - if I look at Fisher Fund's flagship NZ Growth fund chart of performance for the last 20 years, they are consistently beating the market by a good margin (after fees).
    Can someone please explain what I am missing i.e. am I misinterpreting the graph?

  2. #2
    Member
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    Wellington
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    Default

    There is a very long and well-worn debate about this topic. You are not misinterpreting the graph, but the graph doesn't explain everything. I too would be interested to hear about this phenomenon in New Zealand, but I wouldn't wait for answer to help you decide. I personally choose active over passive funds and I trade actively in three markets, but that too is nothing very remarkable.
    Last edited by Fred114; 10-09-2021 at 12:57 PM.

  3. #3
    Senior Member
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    Nov 2018
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    Christchurch
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    702

    Default

    Quote Originally Posted by fran1942 View Post
    Hello, everything I read says that Active managers rarely beat the market and virtually never over a long term. I understand this and am happy to invest in passive funds for this reason.
    However, many NZ Active funds seem to defy this. For example - if I look at Fisher Fund's flagship NZ Growth fund chart of performance for the last 20 years, they are consistently beating the market by a good margin (after fees).
    Can someone please explain what I am missing i.e. am I misinterpreting the graph?
    The most important factor when looking at these actively managed funds is 1) HOW they come to those figures and 2) are they audited figures?

    For the vast majority of these managed fund claims, they boast returns that are NOT net of taxes. A Kiwi Saver fund would not simply disclose the net tax returns due to each individual is taxed at different RWT rates. If you would ask Warren Buffet about these funds, he would always factor in taxation (and he and his side kick Charlie Munger have been openly vocal against the EBITDA metrics often used in finance to interpret earnings of a company, as Munger would say, "It's the kind of BS they teach at Finance schools"). The problem in NZ is there's a focus for dividend payment (not that it should matter to the end result of the investment gains), instead of tax free capital gain growth. You have taxation that distorts the overall return of the fund or shareholding. So when you look at their claimed returns year after year, they are NOT telling you the whole picture and please beware, there are MANY different types of management fees associated in the operations of managed funds.

    The NZ FMA (the Financial regulatory in NZ) does a poor job in ridding the financial nonsense I see in NZ. For eg NZ financial advisors are not privy to advise on individual's tax situation and instead, they gladly point you to someone they know who is a tax specialist (and thus churn out more fees at the client). When you look at the CFP over in N. America, they set their exams based around taxation. It's probably the first question asked when a person sits in the office of a financial planner ; what tax bracket are you in? why is it important for long term capital gains that have a lower tax rate, why dividends create a tax liability, list goes on.

    Perhaps the biggest elephant in the realm of investments in NZ is the tax free capital gains from owning residential houses. We should not be surprised how much houses have gone up in NZ. But let's not get carried away here. Warren Buffet has proven only very few managed funds around the world "can consistently" beat the market index. I'll leave with Buffet's rant below:

    https://www.youtube.com/watch?v=xp9KUCel778

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