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Can We Trust the Investment Statement?

5 March 2010

Investors should be entitled to trust the information provided in an investment statement.  After all directors have signed and certified the truthfulness of what has been presented, and there is information signed off by auditors and the accountant.  Investment statements were only introduced a few years ago.  Someone during the reign of the last Labour Government in their supposed wisdom decided that investors only needed to be presented with an investment statement, along with application forms to invest, rather than the more compelling prospectus.

We all know with the benefit of hindsight that much of the information provided in investment statements particularly those relating to finance companies, was little more than fiction.  Without the fiction, fewer dollars would have been squandered.

Recently it has come to the media’s attention that one of the KiwiSaver managers had not been particularly truthful about historical investment returns.  The manager had in fact introduced cash to the funds to prop up the return.  Huljich has been found out, and the returns are to be recalculated.   Huljich as a fund manager does not have much of a track record in investment circles.  About the only claim of fame seems to be that Don Brash and John Banks are directors.  Huljich had previously made headlines with inappropriate sales techniques for KiwiSaver, going door to door, and even to mental hospital patients.

Outspoken economist and fund manager (who also has competing KiwiSaver products) in a recent Sunday Star Times article stated “That Huljich can blatantly mislead prospective investors in his KiwiSaver scheme without sanction from the Government Actuary is an unconscionable indictment of the current regulatory and enforcement regime.  In my view the man is not fit to make financial offers to the public.  The Huljich schemes should be wound up and funds distributed across the default KiwiSaver providers – that is the only course open to restore any confidence in KiwiSaver supervision”.  These are strong words from a man, whose companies’ own investment statements have come in for criticism and have required amendments to be made.

According to his data, the Huljich Balanced Fund reported a slightly positive return for the 18 months to March 2009, when in fact the actual investment return was around
-16% compared to the average provider’s return of about -15%.  The Conservative and Growth Funds returns were also dramatically overstated.  Even investors in these funds would not have been able to calculate genuine returns.  As KiwiSaver funds, money is generally received via IRD once a month.  Your KiwiSaver deductions for February are unlikely to be received by IRD until the 20th of March, so most likely will not have reached your provider until early April at the earliest.

It also seems that some managers may also be discounting their management fees to make it appear that the returns that they achieve compare well with their competitors.  This was a practice used by Kiwifruit exporters in the 1980’s when they were competing for crops based on the previous season’s returns.

There needs to be a clear set of standards for funds to disclose their returns, so investors and analysts can see how well each manager is performing.  There also needs to be an end of the two tier KiwiSaver market whereby all providers operate under the same high standards as the default providers.  Currently it seems it is more akin to the default providers operating like banks under the governance of the Reserve Bank, and the majority of the players under little control at all, similar to how many finance companies used to operate.

Disclosure: As required under the Securities Markets Act 1988 and the Securities Markets (Investment Advisers and Brokers) Regulations 2007, a Pascoe Barton disclosure statement is available on request free of charge, by contacting Pascoe Barton Limited on (07) 306 0080 or from www.pascoebarton.co.nz.

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