NZ fund managers no dunces

Interpret with care
Yesterday saw the release of a report that shed some interesting insights into the investment sector in New Zealand and abroad.

Granted, the Morningstar Global Fund Investor Experience report positioned New Zealand in a very negative light – ranking New Zealand last out of 16 countries with a D-. But if you take the survey on face value then you may get the wrong message. As with any survey, the Morningstar results need to be interpreted with care.

The Morningstar report doesn’t comment on investment performance but instead focuses on the structures of the funds that New Zealanders invest into – the regulatory framework, taxation, transparency and fees.

Here in New Zealand managed fund providers are governed by a raft of different organisations and associations including the Securities Commission, Investment Savings and Insurance Association, Companies Office, Government Actuary, Insurance and Savings Ombudsman, Commerce Commission, Privacy Commissioner, Corporate Trustees and others– all of which have a mandate to look out for investors’ interests.

Amid incorrect assumptions around our country’s structures (in particular, tax), the report does raise some valid issues including the need for investors to know the make up of their portfolios and where their money is invested. The industry has been closely involved in the development of a raft of new legislation designed to address many of these issues.

Overall, New Zealand does not deserve an A, more work needs to be done in the investor space to achieve this; but New Zealand is nowhere near a D- either. New Zealanders have access to high quality managed funds but there are always opportunities to make investment easier and ensure investors are more informed.

Overall, the report is useful in that it has identified issues that New Zealand is already working on and reinforces the work that is underway. In the meantime, we encourage Morningstar to consider reviewing its survey with a better understanding of New Zealand’s system and correct information and release an updated report accordingly.

Peter Verhaart is General Manager at AXA Global Investors.

NZ fund managers need to wake up and smell the roses. Investors think NZ fund managers are exuding the perfume of rose manure, not rose fragrance. Instead of calling for an updated report or thinking they've got Madoff therefore were are better off in godzone, is not going to solve the problem. If we do a bit of thinking about the subject we can come up with our own list of one man recessions in NZ. The NZ fund managers may be working on the issues the report highlighted, but I have not seen the evidence yet from either the regulators or the fund managers.

What I think is needed;

1. Establish industry wide standards of due diligence, disclosure, transparency and quality assurance practices.

2. All 6,000 odd NZ advisers lift competency to Authorised Financial Adviser level.

3. Responsibility for investor protection and trust to rest with all stakeholders with a greater weighting to fund managers and insurance company's.

4. Authorised Financial Advisers not allowed to receive income from fund managers or insurance companies, 100% fees for service.

5. All fund managers and insurance companies to produce after tax and fees returns on all there products equal to or greater than inflation over any rolling 5 year period.

I would need rose tinted glasses to see all the above ever happening. If it doesn't happen get used to the D- hat. A final thought on where NZ fund managers stand, have a look at how many of you get to look after the NZ Superannuation Fund assets.

You can listen to Philip on Morning Report here http://www.radionz.co.nz/__data/assets/audio_item/0004/1953589/mnr-20090520-0816-International_survey_on_fund_mangement_overly_harsh-m048.asx

I have spent time in both the US & China evaluating their funds management industries (in fact I completed a substantial JV in the Chinese funds management industry, and was a Board representative on another Chinese funds management organisation).

Having reviewed full report I remain unsure of who were the subjects of the research - but would strongly suggest that both the US & Chinese jurisdictions have massive deficiencies in the areas of investor protection, prospectuses and investors' reports, transparency in sales practices and the media, fees and expenses, taxation, and distribution practices

I have also spent a large chunk of my career in both the NZ & Australian industries - and whilst there is always room for improvements – would advocate that the funds management industries are as robust and comprehensive as any in the world. It is argued by respected industry observers that the Australian funds management industry is alongside the US industry as the most sophisticated in the world.

I agree with deficiencies in the area of transparency – where there is a need for full & fair disclosure globally. It is difficult to single out NZ in this area.

Whilst regulation is a significant component of an industry development, the inference is that this report was evaluating all components of the funds management industry. In this case, I would significantly disagree with the headlines and question whether the authors physically visited each of the 16 jurisdictions referred to.

Here is what the ISI says
The Morningstar report of managed fund investor experiences which place NZ at the bottom of an international list is not a great surprise.

The industry has been calling for improvement in a number of areas of regulation and reporting requirements. The Morningstar report adds further weight to a reform agenda. Managed funds represent a significant and increasing part of personal savings in this country and need to have robust protection. Some of the remedies are within the control of fund managers and others are a question of Government policy.

The ISI is already working to introduce improved voluntary standards for consistent disclosure of fees and charges and reports on investment performance.

In the section on taxation we believe the report is unduly harsh. This industry has for many years called for reform of the over-taxation of savers. ISI has consistently called for incentives to encourage long term savings, similar to those that exist in other countries. The fact that these have been slow coming is a reflection of the neglect the savers have endured from policymakers. The introduction of the PIE tax regime from 1 October 2007 was a big step forward and we have seen a large swing to PIE tax products. We understand that the Morningstar low rating is driven by the fact a large number of managed funds are still taxed on the old basis. However, many of these funds are small and the costs and difficulties from legislation requirements for closing or merging the small funds would exceed the value of taxation gains. The industry is actively encouraging individuals to voluntarily switch to PIE tax products as a more efficient means to bring value to investors.

It seems that disclosure of portfolio holdings would not be difficult to achieve. It is only a position at a single point but if this is important then we will look at providing this information

This industry is rigorous in its compliance with regulation. We accept the Morningstar suggestions that some regulation hurdles could be raised for the benefit of investors. ISI will continue its efforts to improve regulation and the resulting experience for New Zealand investors.

The Morningstar recommendation that fund mangers explicitly disclose their affiliation with custodians for better protection of fund investors makes good sense. ISI will be encouraging its members to adopt this as an additional voluntary disclosure.

The Morningstar report needs to be taken in the context of identifying areas where the industry can further improve its performance and experience for investors and on that basis is a welcome addition.

Press release from Vance Arkinstall, ISI CEO

It seems quite odd that despite Morningstar's analysis the major scandals occur in countries that rate highly. It would also help if Morningstar made more of an effort in New Zealand rather than service NZ clients from Sydney. Maybe they could then make a difference on the various issues they are so quick to criticize on. The issues around portfolio disclosure by NZ fund managers is not properly understood, certainly as it pertains to NZ holdings. Morningstar seem to think that NZ must just follow the Australian way rather than make a concerted effort to undersrand why NZ is different i.e. it does not suite their business model to have things different in NZ.

Well, maybe NZ fund manager are rated 'D-', but I wonder what US fund managers are rated 'A' for? Only need to look at Lehman Brothers, AIG, Citigroup, and of course, Madoff.
Btw, Global Finance released the top 50 safest banks on Feb 25 2009. No US banks fall into the top 10 (all European Banks), not even top 20. Only Wells Fargo (21) & US Bancorp (26) is in the top 30, follow by Bank of NY Mellon at 35 and JP Morgan at 47.

Here's what Tim Williams, partner and Chapman Tripp has to say:

Some of the responsibility for the poor relative investor experience performance of New Zealand managed funds lies with our regulatory environment and Morningstar inaccuracies, not the fund managers themselves, says Tim Williams, a Partner with Chapman Tripp.
Mr Williams was commenting on the global analysis by US-based Morningstar Fund Research which gave New Zealand a D- for investor experience and the bottom overall score among 16 countries. Funds’ financial performance was not part of the evaluation criteria.
“Look closely at the results, and New Zealand secured its lowest scores in the investor protection, transparency in prospectus and reports and tax categories; getting D- in all three.
“Clearly, the fund managers do not control the taxation regime and they can scarcely be blamed for what Morningstar perceives as insufficient resourcing of the Securities Commission.
“The report is also inaccurate in some places, for example in the alleged “lack of portfolio-holdings disclosure”. In fact, asset lists for unit trusts are publicly available in financial statements registered with the Companies Office annually.
“Similarly, New Zealand might have been judged less harshly had Morningstar been aware that all prospectuses must be registered with the Companies Office. True, this does not include investment statements, but New Zealand was cited as having no centralised public website for offering documents, which is untrue.
“Also we were cited as the only country where a typical investor pays a tax rate of more than 30% for capital gains generated from mutual fund investing. However the maximum PIE tax rate is 30% (with many investors’ rates being lower), and PIEs do not pay capital gains tax on their New Zealand and certain ASX listed investments. Outside funds, New Zealand does not have any general capital gains tax at all.
“New Zealand was criticised for not having laws requiring custodians to be independent of managers. However unlike some countries, including Australia, New Zealand’s laws require independent trustees, and the trustees appoint the custodians so adequate protection is provided through a different means.
“It is also worth noting that in those areas over which the fund managers can exert greater control – transparency in sales and media, fees and expenses and distribution/choice – New Zealand scored B, B- and C+ respectively,” Mr Williams said.

As a customer of two well-known NZ managed funds companies I heartily concur with this rating especially as far as investment returns disclosure is concerned.

The first company provides an annual one page report stating this is what your investment was worth last year and this is what it is worth this year. Only two figures of any particular relevance!

The second company does somewhat better by adding two more figures: how much you contributed and how much you earned during the twelve months, along with investment performance percentages by portfolio. It is impossible to confirm if you are getting the published percentage returns or not.

I suspect that my experiences are fairly typical of NZ investment disclosure standards.

My argument is if these companies were banks and my investments were bank accounts ComCom would be suing the pants off them for lack of disclosure.

Until the managed fund industry starts providing investment return statements like bank account statements, itemising contributions, withdrawals, fees, and earnings transactions for each month so you can actually see what is happening to your money, I for one will not be throwing any more money their way, Kiwisaver or no Kiwisaver. At least with other forms of investment like property and shares you know exactly what is happening to your hard-earned money!

I have spent time in both the US & China evaluating their funds management industries (in fact I completed a substantial JV in the Chinese funds management industry, and was a Board representative on another Chinese funds management organisation). Having reviewed the report I am unsure of who were the subjects of the research - but would strongly suggest that both jurisdictions have massive deficiencies in the areas of investor protection, prospectuses and investors' reports, transparency in sales practices and the media, fees and expenses, taxation, and distribution practices

I have also spent a large chunk of my career in both the NZ & Australian industries - and whilst there is always room for improvements – would advocate that the funds management industries are as robust and comprehensive as any in the world. It is argued by respected industry observers that the Australian funds management industry is alongside the US industry as the most sophisticated in the world.

I agree with deficiencies in the area of transparency – where there is a need for full & fair disclosure globally.

Whilst regulation is a significant component of an industry development, the inference is that this report was evaluating all components of the funds management industry. In this case, I would significantly disagree with the headlines and question whether the author physically visited each of the 16 jurisdictions referred to.

In regards to portfolio holdings not being disclosed. I would imagine Morningstar is comparing NZ to other countries it covers where fund managers give Morningstar their portfolio holdings on a regular basis. When I worked in the States for example most fund managers gave Morningstar their holdings every 3 months. I found this to be very useful when deciding, which fund to invest client's monies in. When I have spoken to Morningstar they told me that New Zealand mangers do not like disclosing their holdings as they feel they are giving up trade secrets or something.

Transparency needs to be improved.