On Simplicity becoming cash flow positive

27 August 2018

I like Simplicity’s range of investment and KiwiSaver products. It’s no secret that I’ve recommended Simplicity products to many of my clients and continue to do so.

I’m delighted to hear that Simplicity now generates enough revenue to be cashflow positive. To date, Simplicity’s operating expenses have been financed by money loaned to it by its founder, Sam Stubbs. (Interest-free, no less.) Simplicity has become cashflow positive sooner than Stubbs and the team expected, which is a great outcome.

With all of my clients, I talk about the risk of Simplicity not being sustainable and what would happen if this was the case. I’d mention this even if the fund manager were cash flow positive, because this is a perennial risk.

But I’ve never thought of this as a significant risk when it comes to Simplicity. The reason comes down to the underlying assets of the Simplicity funds.

The underlying assets in Simplicity’s funds are highly liquid. If something happened to Simplicity, it would be pretty simple for the Public Trust (which supervises the fund and acts as trustee for the investors in the funds) to redeem these interests and turn them into cash or to appoint another manager. Any investor loss if Simplicity went under should be minimal, and the administrative costs should be low.

By contrast, consider a managed fund where the underlying assets were not liquid. For instance, I had some involvement with some property development funds in Australia where the developments weren’t able to be completed. The underlying assets were half-developed properties, raw materials, etc, and they were offset by significant liabilities. It took forever for investors to get any money back, and a huge portion went to professional services firms involved with the liquidation/administration.

The nature of Simplicity’s underlying assets is one of the reasons I’ve been quite sanguine about investing via Simplicity myself and recommending Simplicity to friends, family members, and clients despite Simplicity being new and cash flow negative for a period.

The fact that an independent third party (the Public Trust) holds the funds on trust on behalf of investors is an important factor in terms of protecting clients regardless of the fate of the fund manager (whether this is Simplicity or any another credible fund manager). However, as I’ve explained above, the nature of the underlying assets is also highly relevant.

On a final note: one thing that I’m excited about with Simplicity becoming cash flow positive is that it means that fee reductions may be on the horizon. The funds management business is a relatively scalable model: managing a $4 billion fund isn’t much more expensive than managing a $400 million fund. This is why you hear of so many billionaires coming from the investment world. I’m hopeful that Simplicity will be in a position to reduce its fees at some point in the future. Watch this space!


investing, liquidity, risk

About the author 

Sonnie Bailey

In his spare time, Sonnie likes telling people that he’s a former Olympic power walker, a lion tamer, or that he is an orthodontist. He is none of those things. In reality, Sonnie is a financial planner based in Christchurch. Through his business, Fairhaven Wealth (www.fairhavenwealth.co.nz), he provides independent, advice-only, fixed-fee financial planning services. Sonnie is a “recovering lawyer”: he has specialised in trusts and personal client work. He has also worked as a financial services lawyer for many years.

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