IMPORTANT: This report is for informational purposes only ... Research Reports... · IMPORTANT:...

PREPARED BY

Clive Fernandes

April 2020

NATIONAL CAPITAL

[email protected]

www.nationalcapital.co.nz

IMPORTANT: This report is for informational purposes only and is not

intended to be financial advice. Please contact us if you want advice on

your KiwiSaver scheme investment. A disclosure statement is available, on

request and free of charge.

mailto:[email protected]

http://www.nationalcapital.co.nz/

Introduction

There's a lot more to selecting a KiwiSaver fund than just checking past returns and fees. If your hard-earned money is invested in KiwiSaver, you need to ask the important questions to understand where and how that money is invested.

What questions are important to Investors?

What type of investments is your fund manager making to give you those returns? Are you comfortable with them? What are the processes they use to ensure future returns remain consistent? National Capital has researched and provided data in this report to help you answer these questions. This Fund report is structured as a series of questions we believe KiwiSaver Investors should ask and know the answers to. We have presented the data here without opinion to ensure that you can make an informed and educated decision on your KiwiSaver investment based on the facts.

CONTENTS

01 PROFILE

Who is Milford? Facts & History of the KiwiSaver Provider

02 PEOPLE

Who Are the People Looking After My Money? The Investment Team and Their Incentives

03 SECURITY

How Do I Know My Money Is Safe? Governance & Compliance Processes

04 PROCESS

How Do They Decide Where to Invest? The Investment Processes Followed by the Manager

05 PERFORMANCE

How Well Does the Fund Perform? Net Returns and How They Are Achieved

06 FEES

Are the Fees Reasonable? Breakdown of Fees and Comparison to Other Providers

07 ETHICS

Does Milford Invest Responsibly? Social and Ethical Considerations

© National Capital Limited. This report is for informational purposes only and is not intended to be personal financial advice.

Please contact us if you want financial advice on your KiwiSaver scheme investment. 1

Who is Milford?

PROVIDER FACTS Milford

ESTABLISHED 2003

Assets Under Management (KiwiSaver) $2,028,600,116

KiwiSaver Members 45,016.00

New Zealand Based? Yes

Awards - Consumer NZ People’s Choice Award – KiwiSaver2019 - INFINZ Fund Manager of the Year – Winner, Equities 2019 - Morningstar Fund Manager of the Year – KiwiSaver Category, New Zealand 2019

History

Milford Asset Management was formed in 2003 by an experienced group of individuals who recognised the need for an investment company that provides New Zealanders with a world-class investment partner they can trust. Brian Gaynor was one of the original founders of Milford Asset Management and has also been a board member of a number of listed and public owned entities, including the Guardians of the New Zealand Superannuation Fund (NZ Super).

The Milford KiwiSaver Plan is a wholly-owned subsidiary of Milford Asset Management Limited. It was created to enable investors to take advantage of the investment expertise and experience of the Milford Asset Management Limited team.

Size

The Milford KiwiSaver Plan manages four funds and has a total Assets Under Management (AUM) of $2,028,600,116. The Milford Active Growth Fund (referred to as ‘the Fund’ throughout the report), invests NZD $1,369,412,973.



Who Are the People Looking After My Money? The Investment Team and Their Experience

Wayne Gentle Chief Investment Officer & Head of Australian Investments

Johnathan Windust Portfolio Manager & Deputy CIO

Wayne is the Chief Investment Officer at Milford and the Head of Australian Investments. He is the Portfolio Manager of the Australian Equities Wholesale, Trans-Tasman Equity and Australian Absolute Growth Funds. He has over 20 years’ experience in managing a diverse range of Australian equities portfolios.

Prior to joining Milford, Wayne was Deputy Head of Australian Equities at Colonial First State Global Asset Management. Previously, Wayne held Senior Analyst and Deputy Head of Research roles with Allianz Global Investors and spent 10 years with JP Morgan.

Jonathan is Deputy Chief Investment Officer, Portfolio Manager of the Milford Active Growth Funds (Unit Trust & KiwiSaver) and Co-Manager of the KiwiSaver Aggressive Fund. Prior to joining Milford in 2008, Jonathan worked for Gartmore Investment Management in London where he was Portfolio Manager for the Royal Bank of Scotland Pension scheme which had assets in excess of NZ$25 billion.

While at Gartmore, Jonathan was also responsible for investment strategy and investments into individual private equity funds and companies across Europe and Asia. Prior to that, he worked for BT Funds Management, Frank Russell and the New Zealand Dairy Board (now Fonterra).

David Lewis Portfolio Manager & Deputy CIO

William Curtayne Portfolio Manager

David is Deputy Chief Investment Officer and is the Portfolio Manager of the Milford Diversified Income Fund. He is also the Co-Manager of the Milford Trans-Tasman Bond & Global Corporate Bond Funds.

David joined Milford in 2013 from Merrill Lynch where he worked in Sydney and London for eight years in a variety of areas including credit research, emerging market research, and principal investments in high yield/distressed credit. Prior to this, David spent four years as a fixed income analyst at BT Funds Management and Principal Global Investors, based in Sydney and London.

William is the Portfolio Manager of the Australian Absolute Growth Funds and the Milford Dynamic Funds. William is also Co-Manager of the flagship Milford Active Growth Fund. William joined Milford in 2010 and has been working from Milford’s Sydney office since its establishment in 2014.

William visits and speaks to hundreds of companies every year and conducts a detailed financial analysis to uncover high-quality investment ideas.



How is the Investment Team Structured?

The responsible oversight body for approving and ensuring adherence to Milford’s Statement of Investment Policy and Objective (SIPO) is a committee of the Milford Asset Management Board (‘Investment Committee’). The Investment Committee meets regularly and senior members of the Investment and Business teams, attend the Investment Committee

The investment team at Milford is made up of a three-person executive team (listed in the previous section), responsible for the oversight and portfolio management of specific funds. The rest of the team is made up of twenty-three investment professionals with varying levels of experience and involvement in the analysis, management, and execution of their respective fund strategies.

In regards to the key personnel involved with the management of the Active Growth fund, Johnathan Windust and William Curtayne are responsible for the portfolio management of the fund, with eleven and a half years and six years of experience with this fund respectively.

Incentives/Alignment

Employees at Milford are personally invested in their funds to ensure the alignment of obtaining returns and responsible investing are matched. Milford developed a framework to illustrate Investor Rights to ensure that the way they invest is beneficial to their clients. Here is what they believe your investor rights are:

1. Trusting someone to look after your money 2. Knowing your money is managed responsibly 3. Knowing where your money is being invested 4. Knowing the value of your investments 5. Access to your investment 6. A manager that actively manages risk and return of your investment 7. Access to fair and reasonable fees

Below is a link to their investor rights page that displays their values in full:

Investor Rights www.milfordasset.com/new-to-investing/investor-rights



https://milfordasset.com/new-to-investing/investor-rights

How Do I Know My Money Is Safe?

All KiwiSaver Scheme Providers must ensure they meet regulatory standards and act with customer interests in mind. KiwiSaver Scheme Managers must exercise care, diligence and skill in the investment of scheme assets, and act in accordance with the stated investment policy and objectives. The FMA monitors that KiwiSaver Schemes are compliant with their obligations. Additionally, KiwiSaver Scheme Trustees also have a responsibility as front-line supervisors for monitoring the management and administration of these schemes.

Milford's Custodian

A custodian plays a key role in protecting your investments. They hold your money and investments (i.e. keep custody of them) on your behalf. So they are the legal holder of your assets while you are the beneficial and ultimate owner. Milford’s custodian is National Australia Bank Ltd (NAB)., Australia’s largest business bank. NAB is the world’s 42nd largest financial services company with USD$49.2 billion in revenue. The bank has a AA- rating according to S&P Global Ratings and is ratest the 17th safest bank in the world by the Global Finance Magazine.

Milford's Supervisor

A supervisor is a licensed entity independent of a KiwiSaver scheme provider that supervises the provider’s management of the scheme. KiwiSaver schemes are trusts, and (except for restricted KiwiSaver schemes) the terms of the trust deed states that the supervisor (or another custodian) must hold all contributions and investments in trust for the investors. Milford KiwiSaver Scheme’s supervisor is Trustees Executors Limited. Trustees Executors is a professional New Zealand Trustee Company that provides a range of financial and trust services to individuals and also the corporate sector as a Licensed Financial Markets Supervisor. Trustees Executors oversees the administration and supervision of client funds totalling in excess of NZD$122 billion.



Milford's Governance Process

The responsible oversight body for approving and ensuring adherence to the SIPO is a committee of the Milford Asset Management Board (‘Investment Committee’). The Investment Committee meets regularly and senior members of the Investment and Business teams, attend the Investment Committee. The objective of the Investment Committee is to assist the Milford Board to discharge its responsibilities in relation to investment oversight including the Plan’s portfolio structures, performance and risk. An investment performance report containing the key performance considerations is presented to the Investment Committee at each of their meetings. Performance is analysed as per the following time periods: one month, one quarter, six months, one year, three years, five years and since inception (both absolute and per annum). More frequent or specific reporting occurs if the Investment Committee or the Milford Board believes this is appropriate, given specific market or Fund developments. Milford’s key performance considerations can be found in their SIPO document, section six.



How Do They Decide Where to Invest? Investment Beliefs

Milford’s investment process involves conducting proprietary research. They undertake analysis of the macro-economic environment as well as fundamental analysis of the industries and individual entities within their investment universe. Macro-Economic Analysis Milford’s macro-economic analysis, via the monitoring and analysis of economic data, aims to identify changes to the prospects of particular asset classes and industries, including the direction of interest rates. Fundamental Analysis Milford’s fundamental analysis aims to identify the best opportunities within identified asset classes and industries for investment. They aim to meet with a large number of companies each year across a wide range of industries to discuss their prospects with the management of the companies. When considering individual companies, Milford seeks to understand key value drivers for bond and share investments including; the company’s competitive position and industry structure, the strength of its balance sheet, the quality and sustainability of earnings, quality of the board and senior management, and ESG factors. Milford’s Investment Forum meeting brings together all of their research where investment ideas are formally presented and debated for potential implementation by the Portfolio Managers. The Investment Forum aims to promote collaboration on investment decisions and leverage the extensive industry experience and knowledge, both in New Zealand and overseas, held amongst the team. The Portfolio Managers are responsible for the final selection of the securities to include within a portfolio.



Milford’s Investment Process

Here is an infographic of Milford’s investment process, obtained from their SIPO document:

Investment Monitoring

Milford empowers Portfolio Managers of individual Funds with the autonomy to make tactical asset allocation decisions within the asset allocation ranges outlined for each Fund. Portfolio Managers make these investment decisions on an active and continuous basis to improve the risk-adjusted returns of the Funds.

They actively monitor the Funds to ensure that investment authority limits are not breached. In cases where these limits are breached, they will take action to rebalance the Fund’s portfolio in line with the authorised asset ranges.



How Well Does the Fund Perform?

Fund's Average Returns vs Industry

The last 5 years average return for the Fund has been 7.40% after fees and taxes. The industry average for the annual return of Growth Funds has been 5.60%. The data has been derived from the Morningstar KiwiSaver Survey website. The figure below shows the year on year comparison between the Fund and the industry average. The Fund vs. Industry



https://www.morningstar.com.au/Funds/KiwiSaverReports


Fund's Returns vs Industry (Continued)

The chart below compares the after fees and before-tax returns over the past 5, 3 & 1 year of the Fund to the industry average. This data is derived from the quarterly Morningstar KiwiSaver Survey. The Morningstar KiwiSaver Survey calculates returns post fees but before tax.

The Fund vs. Industry

*Morningstar takes the associated tax credit into consideration when calculating and publishing these returns, while some fund managers base their published performance figures on month-end unit prices only.




Where Is Your Money Being Invested to Achieve Those Returns?

Asset Allocation data shows you where your Fund Manager has invested your money. This allocation can make a big difference to the volatility, risk and returns generated. Thus, it is important for investors to know what the asset allocation of their fund is. Growth vs. Income Assets Not all Growth funds are created equal. Some KiwiSaver Growth funds have a much higher allocation to growth assets as compared to others. The Fund has a target allocation of 78% to Growth Assets* and 22% to Income Assets*. The average allocation of growth assets in Growth Funds is between 65% and 80%.

*Growth assets include: Commodities, global shares, alternative assets, trans-Tasman shares, and real assets *Income assets include: Fixed interest and Cash **Average is calculated by taking the high and low variance calculations on the dataset provided by the Morningstar KiwiSaver Survey.



ASSET ALLOCATION

Asset Allocation Detailed Breakdown Breaking down the Growth/Defensive allocation gives us further details of what asset classes the Fund is using to generate its returns. The Fund’s target asset allocation was as follows:

Australasian Equities 46%

International Equities 32%

International Fixed Interest 10%

Cash and Cash Equivalents 6%

New Zealand Fixed Interest 4%

Listed Property 0%

Unlisted Property 0%

Commodities 0%

*Includes listed and unlisted infrastructure assets and alternatives



Global Allocation You want your fund to achieve returns with appropriate diversification, not only in different types of assets but also where those assets are located. The Fund has 44% of its investments Internationally and 50% in Australian and New Zealand investments. The remaining is in cash and alternative investments. International vs. Aus/NZ Investments



What Latitude Do Managers Have to Deviate From Weightings?

Your fund manager has a degree of power in how your money is invested among the different asset classes. This means that the manager has the ability to change the weightings of the portfolio between the minimum and maximum of the asset classes based on where they see the most attractive investment opportunities. Below is a table that explains the level of deviation the manager has when determining the weights for this fund:

ASSET CLASS BENCHMARK ASSET ALLOCATION (Long Term Target)

MINIMUM MAXIMUM

Cash 6.00% 0.00% 70.00%

NZ Fixed Interest 4.00% 0.00% 70.00%

International Fixed Interest 12.00% -10.00%* 50.00%

Australasian Equities 46.00% 10.00% 100.00%

International Equities 32.00% 0.00% 60.00%

Growth Investments 78% 20.00% 100.00%

Income Investments 22% 0.00% 80.00%

*A negative minimum value indicates that Milford is able to use short selling, or the use of derivatives to achieve the fund objectives. While borrowing is not allowed, they might invest in funds that do.



Are the Fees Reasonable? Fees Compared to Industry

The fees for the Fund total of 1.06% compared to the industry average of 0.94%. This can be further broken down into the membership fees, management fees, performance-based fees, and other fees and is displayed in the table below.

FEES MILFORD GROWTH FUND PEER GROUP - GROWTH FUND

Management Fee 1.04% 0.79%

Performance-Based Fees 0.00% 0.012%

Other Fees 0.02% 0.14%

Total Annual Fund Fees 1.06% 0.94%

+ Membership Fee (annual) $36.00 $29.90

Fees to Return Ratio

This figure shows us how much of the fund's returns are being used up in fees. The Fund’s fee to return ratio is 0.14. This is calculated by taking the total fees for this fund (1.06%) and dividing it by the average 5 years return of the fund (7.40%).

Are Fees Dropping as the Fund Grows?

As the size of a fund grows, the % fees charged to an individual investor for management of the fund is expected to decrease. In 2017, the Fund’s total annual fund fees were 1.08% compared to the most recent figure of 1.06%, indicating that it is getting less expensive over time to invest your money into this particular fund. The lower the ratio the better it is for you, as you get more “Bang for your buck”.



Does Milford Invest Responsibly?

Socially responsible investing (SRI) or Environmental, Social and Governance investing (ESG), also known as sustainable, socially conscious, “green” or ethical investing, is any investment strategy which seeks to consider both financial return and social/environmental good to bring about social change regarded as positive by society. Basically, SRI investing is investing in companies that have a positive impact on society, based on a number of factors.

Milford’s Responsible Investment Policy

Milford’s responsible investing consideration goes beyond the industries on their exclusion lists. The company research they do to determine if they invest or not includes ESG (environmental, social and governance) considerations. Once Milford invests, their position as a larger shareholder with an active management style means their ongoing engagements with investment companies can drive continual improvements of responsible practices over time.

Outside of Milford’s investment process, they are committed to making a positive social impact within the New Zealand community through their diverse sponsorship program. You can view more information about their various community partners on their sponsorship page below.

Sponsorships www.milfordasset.com/about-us/sponsorships

Milford is a signatory to the United Nations Principles for Responsible Investment and a member of the Responsible Investment Association Australasia.



https://milfordasset.com/about-us/sponsorships


https://www.unpri.org/

https://responsibleinvestment.org/

Ethical Exclusions

As per the Milford Responsible Investment Policy document, across all Milford funds, including their KiwiSaver funds, they will not directly invest in companies that are directly involved in the following activities:

● the manufacture of cluster munitions

● the manufacture or testing of nuclear explosive devices (NEDs)

● the manufacture of anti-personnel mines

● the manufacture of tobacco

● the processing of whale meat

● recreational cannabis, and

● the manufacture of civilian automatic and semi-automatic firearms, magazines or parts

To the extent it is feasible and commercially prudent, they will avoid indirect investment in companies on the Exclusion List (i.e. through ETFs or other collective investment vehicles). These types of investments are assessed on a case-by-case basis by the portfolio managers and any potential for indirect exposure is carefully considered and factored into investment selection.

Corporate Governance & Proxy Voting

Milford is an advocate for strong corporate governance, shareholder rights, and transparency. They endeavour to exercise their proxy voting rights wherever possible and in a manner which reflects an understanding of the environmental, social, and governance impact of their investee companies. Milford primarily makes voting decisions in-house but does subscribe to proxy advisory services to assist with voting matters if it is considered appropriate.



Sources and further reading: All the data used in this Research Report is as of 31st March 2020.

Active Growth Fund Update: www.milfordasset.com/funds-performance/kiwisaver-active-growth-funds

Milford Documents list (SIPO, Governance Structure, Overview, Responsible Investment Policy): www.milfordasset.com/forms-documents

Morningstar KiwiSaver Survey https://www.morningstar.com.au/Funds/KiwiSaverReports

Milford Responsible Investment Policy: www.milfordasset.com/wp-content/uploads/2018/03/Milford-Responsible-Investment-Policy-Final-March-2018-1.pdf

General explanation of the different types of funds: www.www.canstar.co.nz/kiwisaver/defensive-cash-balanced-growth-aggressive-life-stages/

Fund Finder’s comparison of fund https://fundfinder.sorted.org.nz/fund/milford-kiwisaver-plan---milford-kiwisaver-active-growth-fund-milford-funds-limited/



https://milfordasset.com/funds-performance/kiwisaver-active-growth-fund


https://milfordasset.com/forms-documents


https://milfordasset.com/wp-content/uploads/2018/03/Milford-Responsible-Investment-Policy-Final-March-2018-1.pdf

https://milfordasset.com/wp-content/uploads/2018/03/Milford-Responsible-Investment-Policy-Final-March-2018-1.pdf

https://www.canstar.co.nz/kiwisaver/defensive-cash-balanced-growth-aggressive-life-stages/

https://fundfinder.sorted.org.nz/fund/milford-kiwisaver-plan---milford-kiwisaver-active-growth-fund-milford-funds-limited/

https://fundfinder.sorted.org.nz/fund/milford-kiwisaver-plan---milford-kiwisaver-active-growth-fund-milford-funds-limited/

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