Managers behaving badly

Existing Securities Act fee disclosures haven’t worked

In Securities Act offer documents (being a prospectus and investment statement) manager fees are generally described as a base fee plus expenses charged back to the fund.  This disclosure has never been satisfactory – why should investors see a percentage charge for the base fee but no percentage charge for the other costs?  Disclosure of the total fund cost is much more relevant, particularly given that on occasions expenses recharged are surprisingly high.

Many managers have taken useful steps to address this by charging a capped fee covering the base management fee plus all fund costs.  This is a much more meaningful number for investors.  ANZ, Milford, Nikko and Pathfinder have each adopted this approach (note for those charging performance fees, this is in addition to the capped fee).

Many managers have retained the approach of disclosing the base fee amount only.  To illustrate how the Securities Act disclosure regime is no longer fit for purpose, here is an example of poor fee disclosure by one manager.  The manager discloses its base fee for two funds as 1.0% and 1.25%.  Various other costs and charge backs are described, but no overall cost ratio is given.  The expense ratios for the two funds are not disclosed but can (with some difficulty) be calculated from the fund accounts for the most recent financial year¹.  They are extraordinarily high at 9.93% p.a. and 7.85% p.a.  Investors don’t stand a chance of making money with this cost structure (mercifully there is no performance fee charged).