COMMUNITY TRUSTS ARTICLE
You may have recently read media articles referring to an academic paper suggesting that Community Trusts in Aotearoa/New Zealand had recorded poor investment returns as a consequence of poor investment decisions.
Out of interest and due to our close relationship with Community Trust network, Trust Management has obtained and reviewed a copy of the report from the University of Otago.
Our analysis has raised a number of concerns with the paper and led us to wish to make further comments on its contents, as follows:
Firstly, the report is based on analysis taken over only a three year period. A timeframe of three years is inappropriate to draw any conclusions on the success or otherwise of any long term investment programme.
In our view, "poor" investment returns recorded over such a short term does not necessarily reflect poor skill of trustees, as any investment portfolio, including those employing highly skilful managers, can appear to deliver lower results over short periods, particularly if their investment objectives are to deliver to a long-term horizon.
Furthermore, the report compares funds with different risk characteristics, and for a period which, excluding February and March of 2020 when markets reacted to the COVID pandemic, generally favoured a high degree of risk taking. Any strategy that is more defensive in nature or which deploys other risk mitigating hedging strategies will naturally underperform in a strong 'risk on' environment. This is not an indication of long term underperformance.
We are concerned about the author's rationale for utilising the performance of a single KiwiSaver provider as the benchmark for the analysis undertaken and conclusions drawn, including using a fund that has a risk profile greater than the average of the Community Trusts reviewed. A more appropriate benchmark would simply be a passive reference portfolio comprising a selection of market indices over an appropriate period of say 10 years, and not limited to the period that a single KiwiSaver provider has been operating.
We have also advised the author that it was not particularly clear in the analysis what the source data was, and in our view this undermines the conclusions reached. The author has spliced together a 12 month return for a KiwiSaver Fund (to March 2018) and the remaining two years comprise returns for the same provider's PIE unit trusts, all of which were in their infancy. It is further worth noting that the asset allocation mix for retail, tax paying investors will often differ for non-tax paying investors given the inability to utilise certain tax credits, again undermining the analysis.
We believe the conclusions of the report and its language are alarmist and promote short-termism which is dangerous for good investment governance.
Trust Management believes the investment management models employed by Community Trusts are appropriate. Taking advice from highly skilled and experienced consultants and employing specialists to undertake the day-to-day investment decisions is prudent investment governance practice.
Amongst other important matters, the role of Trustees is to set long term investment strategies, ensure investment costs are kept in check by benchmarking fees and expenses with industry best practice, to monitor the decision making and performance of its advisers, and to act if something is amiss or if outcomes stray significantly from expectations.
However, we also believe that investment strategies are and should be simple to understand. Trustees need to fully understand the investment decisions they are overseeing, and act with caution should their advisors recommend overly engineered, complex, or structured products where the risks and/or benefits may not be clear. In our view, unless investment matters are clearly understood it is difficult for trustees to ensure investment decisions are consistent with the timeframe of the investment strategy adopted.
It is unusual for Trust Management to comment on articles in the media, but in this instance given the damaging, incorrect and undermining comments that have been made, we feel compelled to do so.
We have shared our views on the University of Otago report with its author and disclose that a number of Community Trusts in Aotearoa/New Zealand invest in PIE Funds managed by Trust Investments Management Limited.
If you have any queries, please contact us.