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It's not ethical for managers to keep getting fees on frozen funds

Is it ethical for fund managers to continue to get management fees on funds that have been frozen?

Sunday, September 11th 2011, 5:14PM 1 Comment

by Goldie

Fund managers should not get paid management fees – or at best should have them severely discounted - for the period the funds are frozen. It is immoral that trapped investors are forced to contribute to the profit of their tormentor, against their will and with no option to get out and prevented from making new investments of their choice. Further, a fee cut would serve as a disincentive for fund managers to get in that position or to keep funds closed. Currently it is quite attractive (especially in a bear market) to close funds indefinitely. This forces investors to withdraw from other liquid investments or when rebalancing, funds have to come from elsewhere. It also retains a handsome profit for incompetence. Maybe a receiver should be appointed to determine if the manager continues? It seems incredible that investors are still trapped after three years in mortgage funds, infrastructure funds and other hedge funds etc, and with no say whatsoever and paying full fees for non-performing investments. Regulators could include in the new legislation that fund managers who fail to provide the liquidity promised should forgo profits. In many cases, when funds are frozen management fees are fixed at the old high levels. That’s not right. Of course the corollary would be that advisers should not assess fees on frozen funds – and certainly not at moratoria value, not that many of those are left. Moratoriums didn’t work did they? The poor suckers who invested then voted for the perpetrators to stay in the existence to manage something they couldn’t manage in the first place - another bite at the cherry.

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Comments from our readers

On 11 September 2011 at 10:48 pm Forthright said:
To be fair there are a number of managers of suspended funds who are not charging full fees and are in fact charging nil or substantially reduced management fees. To be fair, managers need to at least cover the costs incurred in the winding up process. Also in a number of cases, managers put the matter of winding up the funds, to a vote by investors. Most sensible investors rejected the sell now at severely depressed market prices, and voted to wait for better prices and conditions to maximise the value of their investments. Therefore you can’t call these investors trapped or imply this process is flawed in some way or another.

It is also worth reminding those who didn’t know, that some managers have paid out investors who had funds invested in illiquid funds.

I recently received a communication from OnePath that they are going to pay out investors in one of their suspended funds. So I say, good on OnePath.

I expect the author is right and in some cases managers are taking full fees on non-performing investments and I also suspect some advisers are taking full fees/commissions on the same non-performing investments.
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BNZ - Mortgage One 7.15 - - -
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Finance Direct 6.10 6.45 6.69 7.10
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First Credit Union 6.45 - - -
General Finance 5.95 6.25 6.50 7.10
HBS Bank 6.15 5.85 5.99 6.19
HBS Special - - - 5.89
Heartland 6.70 7.00 7.25 7.85
Heretaunga Building Society 6.70 6.00 6.50 -
Housing NZ Corp 6.74 5.99 ▲6.39 ▼6.59
HSBC Premier 6.84 5.95 5.95 ▼6.39
HSBC Premier LVR > 80% - 5.75 5.75 5.75
HSBC Special - - - -
ICBC 6.75 5.99 6.39 -
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Kiwibank 6.65 5.99 6.39 6.65
Kiwibank - Capped 5.65 6.50 - -
Kiwibank - Offset 6.55 - - -
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Liberty 5.64 - - -
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NZ Home Loans 6.85 6.09 6.40 6.65
Perpetual Trust 7.70 - - -
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SBS Bank 6.15 5.85 5.99 6.19
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SBS Bank Special - - - 5.89
Silver Fern 5.95 6.10 6.55 7.05
Sovereign 6.85 6.09 6.40 6.65
Sovereign Special - - - 6.19
The Co-operative Bank 6.70 6.00 6.00 6.25
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TSB Special - - 5.79 -
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Westpac 6.59 6.09 6.39 6.65
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