NZ Funds' clients profit from last week's chaos
As markets collapsed last week, NZ Funds mitigation strategies gained roughly $8 million.
Last week was one of the worst in financial markets in a decade. United States shares fell 12.70%1from their high earlier in the month, while New Zealand shares collapsed 7.47%2 from their highs.
At a time when one index tracking manager is urging clients not to panic, Michael Lang, CEO at NZ Funds which has been managing New Zealanders’ retirement savings for over 30 years, says he has a different message.
“What is it based on? Certainly not global economics or share market valuations, both of which point to a downturn. Detailed medical knowledge that no one else has? I very much doubt it!”
“If I was preparing to retire shortly and had been sold an index tracking growth fund or a portfolio filled with nothing but high octane small cap shares, or perhaps avocado farms and vineyards which cannot be sold quickly, I would be taking a good hard look at my financial affairs.”
Lang points out that no one knows what the future holds, how disruptive Coronavirus will be, and how badly financial markets will be hit. “New Zealand investors have the right to know that no one in the world knows what level shares will be trading at in a year’s time.”
“What we do know is that after an unprecedented period of financial prosperity during which New Zealand shares have risen over 360% since 2009, New Zealand share valuations are now at record highs” says Lang. “Whether or not it occurs now, a correction of twenty or more percent is well overdue and will occur at some stage in the future.” The real question says Lang, is how long will it take for markets to recover? Not how far will they fall.
Lang says clients who own diversified portfolios which are appropriate to their age and stage, and are well advised, should not worry. Whereas those that have purchased funds on the internet, chased high returns, or looked only at fees and not at what they are buying may well be in trouble. “Much like the Coronavirus, a serious market downturn when it comes will cause the most damage to those who are vulnerable.”
Lang says New Zealand media and website tools like Sorted have been myopically focused on returns and fees to the detriment of the investing public. He says it is extraordinary how many websites market funds as “top performing” over very short periods of time – he likens this phenomenon to a period when finance companies outdid each other with who could offer the highest interest rate. Lang says “As was the case then, risk is ignored.”
On the government-funded website Sorted there is little or no measure of risk; instead the site compares short-term returns (less than six years) and fees. “Risk has been swept under the carpet in New Zealand, particularly by the media because it falls in the “too hard” basket.” He says “that is not good enough. New Zealanders deserve better.”
Last week was one of the worst in financial markets in a decade. United States shares fell 12.70%1from their high earlier in the month, while New Zealand shares collapsed 7.47%2 from their highs.
At a time when one index tracking manager is urging clients not to panic, Michael Lang, CEO at NZ Funds which has been managing New Zealanders’ retirement savings for over 30 years, says he has a different message.
“What is it based on? Certainly not global economics or share market valuations, both of which point to a downturn. Detailed medical knowledge that no one else has? I very much doubt it!”
“If I was preparing to retire shortly and had been sold an index tracking growth fund or a portfolio filled with nothing but high octane small cap shares, or perhaps avocado farms and vineyards which cannot be sold quickly, I would be taking a good hard look at my financial affairs.”
Lang points out that no one knows what the future holds, how disruptive Coronavirus will be, and how badly financial markets will be hit. “New Zealand investors have the right to know that no one in the world knows what level shares will be trading at in a year’s time.”
“What we do know is that after an unprecedented period of financial prosperity during which New Zealand shares have risen over 360% since 2009, New Zealand share valuations are now at record highs” says Lang. “Whether or not it occurs now, a correction of twenty or more percent is well overdue and will occur at some stage in the future.” The real question says Lang, is how long will it take for markets to recover? Not how far will they fall.
Lang says clients who own diversified portfolios which are appropriate to their age and stage, and are well advised, should not worry. Whereas those that have purchased funds on the internet, chased high returns, or looked only at fees and not at what they are buying may well be in trouble. “Much like the Coronavirus, a serious market downturn when it comes will cause the most damage to those who are vulnerable.”
Lang says New Zealand media and website tools like Sorted have been myopically focused on returns and fees to the detriment of the investing public. He says it is extraordinary how many websites market funds as “top performing” over very short periods of time – he likens this phenomenon to a period when finance companies outdid each other with who could offer the highest interest rate. Lang says “As was the case then, risk is ignored.”
On the government-funded website Sorted there is little or no measure of risk; instead the site compares short-term returns (less than six years) and fees. “Risk has been swept under the carpet in New Zealand, particularly by the media because it falls in the “too hard” basket.” He says “that is not good enough. New Zealanders deserve better.”
NZ Funds met previously with New York-based investment manager James S. Chanos (centre), president and founder of Kynikos Associates, a New York City registered investment advisor. His advice on short-selling has informed NZ Funds' downside mitigation strategies, which have proved their worth in the recent market selloff.
During the Global Financial Crisis, NZ Funds used downside mitigation strategies to make over a hundred million dollars in profits for clients, to help them offset the downturn in their share portfolios. Lang said at the time clients and their advisers wanted to know every single security that they held in their portfolio, how they were priced and why we owned them.” He said what we learned then is part of our DNA today.
“The three lessons we learned in 2009 were: first, ensure clients have access to financial advice so they can talk through their options at any point in time with an expert; second, ensure they own a diversified portfolio which is regularly rebalanced to match their age and stage, as irrespective of how aggressive they think they are they only have so many years to enjoy their capital; and hold downside mitigation assets to stabilise portfolios when things get bad.”
“NZ Funds predominately holds downside mitigation assets in its growth portfolios. These can detract slightly from returns during the good times, but can generate millions in gains when markets crash”, Lang says. “Last week our downside strategies gained over $7.7 million – the worse the market gets the more money we can expect to make.”
Lang says downside mitigation profits smooth the falls, comfort investors, and can be reinvested back into the market at distressed prices to boost clients’ long-term returns. Lang says, “if things get worse, it will be interesting to watch how much money high-flying funds lose and what the reaction of their clients will be to those losses.”
Lang says NZ Funds’ investment team works with global downside management expert Mark Spitznagel, founder of Universa Investments, a hedge fund that exists to help Sovereign Wealth and large endowments funds to manage the inevitable market crashes.
“The three lessons we learned in 2009 were: first, ensure clients have access to financial advice so they can talk through their options at any point in time with an expert; second, ensure they own a diversified portfolio which is regularly rebalanced to match their age and stage, as irrespective of how aggressive they think they are they only have so many years to enjoy their capital; and hold downside mitigation assets to stabilise portfolios when things get bad.”
“NZ Funds predominately holds downside mitigation assets in its growth portfolios. These can detract slightly from returns during the good times, but can generate millions in gains when markets crash”, Lang says. “Last week our downside strategies gained over $7.7 million – the worse the market gets the more money we can expect to make.”
Lang says downside mitigation profits smooth the falls, comfort investors, and can be reinvested back into the market at distressed prices to boost clients’ long-term returns. Lang says, “if things get worse, it will be interesting to watch how much money high-flying funds lose and what the reaction of their clients will be to those losses.”
Lang says NZ Funds’ investment team works with global downside management expert Mark Spitznagel, founder of Universa Investments, a hedge fund that exists to help Sovereign Wealth and large endowments funds to manage the inevitable market crashes.
1. S&P 500 Index.
2. S&P NZX 50 Portfolio index.
2. S&P NZX 50 Portfolio index.
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This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter, and NZ Funds is not responsible for any loss that any reader may suffer from following it.
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