Are retail managed funds dead as BT and Westpac seem to think?

It’s a question that has been pondered a lot in recent weeks since Good Returns ran the story about BT/Westpac closing a bunch of managed funds with $185 million in them.

My thoughts on this are that: No, retail funds are not dead. As someone pointed out to me, people may be getting too hung up on the structural issues about whether a fund is retail, mezzanine or wholesale. The key point is that a customer can get access to a managed fund product.

Clearly many advisers use a mix of retail and “wholesale” funds.

One take on this is that many of the big managers are focussed on platform business and getting their funds onto the platform menus as they believe this is where the bulk of the funds flow comes from and that there are efficiencies in distribution.

I can assure you, from discussions with many managers looking to come into the market over the years, that their focus is on the platforms.

While that may be their focus they still need to promote these funds and build their brands.

But there are also many offerings which I would characterise as retail. The characteristics of these funds, in my view, is that they tend to be more niche products from boutique managers and often they are more spicy than the vanilla flavoured mainstream offerings. (Also they can be more complicated).

There appears to be a bunch of funds which fall into this category and are surviving – think Liontamer, Man Investments, Fisher Funds and Platinum.

The issue which is probably more important to discuss is where do managed funds fit in and what is their future? Clearly in recent years we have seen investors and advisers opt for other investments such as shares and debentures over managed funds.

However, I predict that at some stage the tide will turn and that managed funds will be in vogue.

After all they are mainstream investment products in other countries we like to compare ourselves to, and the investment success of the NZ Superannuation Fund shows that good outcomes can be achieved using funds.

The challenge is to get people interested in funds and make them more relevant and effective. It doesn’t matter whether they are retail, mezzanine or wholesale.

I’d like to give a big bouquet to the FPIA Auckland’s branch for organising the first head-to-head debate between Finance Minister Michael Cullen and his opposite number John Key this election.

The two men went up against each other yesterday in a debate in Auckland that was chaired by Craig Stobo.

I reckon there were around 300 people in the room, being a mix of planners and their clients. A damn fine turn out.

In the not-too-distant future one of these two will control the country’s purse strings.

So which one should it be?

My observation is that Cullen came out best, as his grasp of the detail and knowledge made Key look like a newcomer to this game – which he is.

Key certainly hit the mark with some of the people I spoke to afterwards, but that is to be expected, as the audience is more likely to vote National, and Key hit on hot buttons throughout his presentation, even if they were of little relevance.

It constantly surprises me how things, which are pretty small in the scheme of government and nearly irrelevant to our day-to-day lives, can be so polarising.

The Nats may rave on about a big spending government which wastes money – I would counter that and say that the current crowd are tight-wads compared to previous Labour administrations. I would wager that there is not, and never will be, any government that can spend every cent of taxpayers’ money wisely and prudently. They all waste some of it, whether they are in the red or blue camp.

Cullen also appeared to be back in his full-control mode and was quite relaxed and at times very witty.

One comment which was made by a number of people is that the Nats just don’t seem quite ready for the Treasury benches yet.

I’d have to say that I was gobsmacked to see how much Jim Minto is being paid to run Tower.

For the record it is $750,000 plus bonuses which, assuming all goes well, gets him through the $1 mill mark, then there are options too. That’s in the same league as Theresa Gattung at Telecom, which is a slightly larger company than Tower.

Clearly I am not the only one thinking this .

Here is one email I received yesterday:

“His pay should be less than Helen Clark’s, say $250,000 plus bonuses on higher than average sharemarket returns. Deductions for underperformance, as with small business owners.

Insurance is a hit or miss business as evidenced by the results of this company over time.”

I have a lot of respect for Jim and think he has done a good job. And I have to say good on him for negotiating such a deal.

But the issues as I see it are that Tower, according to sharebrokers, is not out of the woods yet. It seems everyone else it deals with is seeing cuts of some kind.

Such exorbitant salaries only help fuel the thought in investors’ minds that the only winners in this game are the fund management companies themselves.

Customers who keep hearing about the need for cost cutting within the organisation see it as one rule for them and one for Tower.

What has to happen is that the board clearly needs to explain its reasoning for such a deal.

Disc: I own shares in TWR

This week’s news about BT Funds getting out of the retail end of the business is – I think – a sad day for the industry.

In the early days of funds management in this country BT stood head and shoulders above the pack and, as a competitor mentioned this week, oozed quality.

It was the Australian funds management company which had the courage to set up a strong New Zealand office and launch local dollar funds. It was the company which delivered investors good returns and also built its brand. Remember those BT television ads where people like Craig Stobo talked about investment. (One thing that doesn’t change is that Craig still wears that blue tie with stars on it).

A lot has changed in recent years and now it has closed its retail funds to focus on wholesale and mezzanine products.

In Australia the debate: “Retail funds are dead” has been raging for a while. I would be fascinated to hear other people’s views on this topic.

We’d like to bring you more thoughts from the company on this and will try to do so as it is a significant trend. However when we found out about it this week and went to the company we got passed onto the PR people at parent company Westpac (who it seems then told other media about it – so much for our scoop!)

I feel for some of the guys who we understand have had their jobs “dis-established”. Many of them have been long-standing and loyal servants of the company.

Whether you like what BT has done or not, it is still a quality house and its products will be available on platforms. You do have to give them some credit for saying this is how we see the game now and we are going to change our business to fit.

It’s interesting to ponder whether this would have happened under the former management or whether this is an idea/model imported from Australia?

I don’t know if any of you guys and gals out there watch Willie Jackson’s Eye to Eye programme late on Tuesday nights on TV One – but I recommend you do.

It’s billed as looking at current affairs through Maori eyes.

The reason I mention it is -not just because it can be good entertainment, but because he debated, last night the idea of lowering the age of entitlement to NZ Super for Maori.

(This was good entertainment with the two Pakeha blokes stirring up the two Maori women. Act’s Stephen Franks described their arguments as unreasonable and the response was: “I’m the most reasonable person I know”).

There’s two points which came out of the programme for me. It showed that superannuation is potentially an election topic this year.

I didn’t agree with the ASFONZ argument that there is little difference between the political parties in this area.

During the show the Maori Party argued that the age of entitlement for Maori should be lowered. Host Jackson, a former Alliance MP, argued that the age of eligibility should be lowered across the board and that NZ Super should be means tested.

Meanwhile Act’s Stephen Franks argued NZ Super is unsustainable and that it should be individualised savings accounts.

The Maori party argument is based on the fact that Maori die earlier so miss out on some of their entitlement, and traditionally many Maori miss out on their pension for a number of reasons.

Frankly their arguments are daft. They are separatist and they are seeking favoritism. If you give the pension to Maori earlier, then smokers should have a lower age of entitlement and women (who live longer than men) should have a higher age of entitlement.

The second point is one I have been interested in for some time, and one I understand Labour may make some noises on. That is people can select their age of entitlement. The pensions paid will be actuarially adjusted so that each person gets the same amount (sort of). People who start early would get a lower annual entitlement while those who start at a later age would be paid more.

It’s an idea which has merit and one I would like to see debated further.

It’s little surprise that the any regulation of Financial Intermediaries is now more years away than many people would like. I did say in a Blog just over a week ago that I wouldn’t be surprised if the Task Force report got put back because of the review of non-bank products.

The way it has happened has been a little strange though. The Ministry of Economic Development prepared a press release on the matter which it forgot to send to people announcing a decision, but the Government still hadn’t seen the report. (Who is running this show?)

What I think is interesting is the reaction to this “delay”. The industry is quite within its rights to be highly disappointed as much work had gone into the issue across the board and it quite rightly had an expectation this effort would lead to changes.

What it has done though is uncover some of the agendas underlying the prospect of change.

The people who are most unhappy with the delay are likely to include the fund manager/life insurance crowds who saw regulation as a way of capturing distribution.

Here’s the argument.

One of the fears of regulation, from an advisory perspective, is that small independent advisory firms would be forced to join bigger dealer groups as has happened in Australia.

The task force’s options paper made some interesting comments along the line that changes it proposes may alter the shape and look of the advisory industry. It went on to say that that was not its aim or purpose, but it may happen. Sort of like saying if it happens it’s not our fault.

What’s been happening back in the real world is that there have been a number of groups saying that regulation will bring about rationalization/consolidation and that is a good thing as the small players will have access to resources and systems they currently don’t have (probably can’t afford).

Others have been a little more blunt and using the fear factor, essentially saying you have to join a big group to protect yourself from being sued etc.

Essentially they saw regulation as a tool to build their dealer groups. (This raises an interesting question which I won’t answer – but you may have a crack at. Whose interest is being served here; the adviser or the manufacturer? Oh and what about the clients?)

Bad luck guys that strategy ain’t going to work for a while.

One of the pluses of the New Zealand environment, compared to the Australian one, is that we have a good mix of big groups and smaller independent financial advisors. It would not necessarily be in the best interests of the industry, nor the consumer to have an advisory industry dominated by big chain stores.

It’s reassuring to see that groups like the FPIA are just going to get on with being prepared for changes when they come. Likewise we hear that at least one other reasonable sized association has been working towards becoming a self-regulatory organisation and has been developing budgets and talking to a prospective chief executive.

If the Task Force has provided a catalyst for organisations to speed up changes, then that is a good outcome.