Just how bad is the NZ Funds Management Industry

Last week, Funds Researchers Morningstar issued a report purporting to compare the Fund Managers around the world.  Unfortunately NZ came in last place.  This was primarily because of taxation issues and limited regulation.

Naturally, the report has stimulated some comments, most of which are not particularly complimentary to Morningstar.  While Morningstar has operations in a number of countries, it is primarily known as a so called independent Research House.  In the past Morningstar has charged fund managers to rate their products and they have sold the research to advisers and others within the industry.  They also provide tables of fund performance to various newspapers.

While there are undoubtedly a few well respected people currently working for Morningstar, over the years we have heard comments from fund managers about the lack of ability of some of the researchers.  Companies that showed any innovation in their products were penalised in their ratings, as were new products.  It effectively took five years for a product to obtain sufficient track record to have a chance to be rated highly!

The issue of fee disclosure was also highlighted.  While the fee structures for New Zealand Managed Funds compared favourably with for example the United States, it has historically been difficult to work out the level of fees actually being paid.  We certainly agree with this.  Historically some managers reported fees on an after tax basis, whereas others reported on a gross basis.  For example a 1% fee after tax, was actually a 1.5% fee. 

The introduction of the PIE regime has to a certain extent sorted this out, as the fees are now all gross.  Unlike some countries, we also have trustee fees, and admin fees which are often paid by the fund manager to the entities responsible for providing the service.  Some managers may also receive a performance fee when investment returns are above certain thresholds.  To complicate matters more, the actual percentage fees for the funds will not be known until after the end of the year.  If a fund falls in value significantly, then the percentage fee will increase.  Conversely when fund values rise, the percentage fee may fall! Therefore the manager will invariably set maximum allowable fees.

There are world class fund managers in New Zealand.  Most likely, they will be managing Australasian share and bond portfolios.  Most International share and bond funds will be managed off shore, and often by a third party with a mandate provided by the New Zealand manager.  The size of the New Zealand market does not justify trying to manage international investments by a New Zealand based management team.  Invariably you find “clusters of excellence” in certain areas, for example Sydney, New York, London, Edinburgh, and Hong Kong.

The so called lack of a regulatory framework in New Zealand was also criticised by Morningstar.  There are arguments for and against regulators.  Most of the major failures in recent times have been in environments where there is strong regulation.  Examples include bank failures occurring in the USA, Madoff somehow losing $68 billion despite the SEC (U.S.  Securities Exchange Commission), MFS despite ASIC (Australian Securities and Investments Commission) etc.  But we do have the world’s elected top regulator Jane Diplock heading our Securities Commission.

Potential investors should not be put off investing just because of one report put out by Morningstar.  It is all in the interpretation.  There are world class investment managers and investment advisers in New Zealand.  Interestingly, Governments all around the world are pandering to credit rating agencies such as Standard and Poor’s, Moody’s and Fitch.  They are exactly the same agencies that have been shown up as providing meaningless ratings of CDO offerings that contributed enormously to the financial mess the world has found itself in over the past couple of years!