Is the end in sight for New Zealand's funds management industry?
Thursday, October 26th 2000, 3:53PM
It's not often that a day goes by without the Government or someone else talking about the knowledge economy and how important it is to New Zealand's future prospects.
Yet, despite all the talk there isn't a huge amount to show for it at present.
Funds management is part of the knowledge economy. If the Government wants to make a difference it should take some steps to boost the industry and stop it becoming the equivalent of the car manufacturing industry New Zealand once had.
We are at risk, through globalisation and an uneven playing field, of losing our funds management manufacturing capabilities altogether. If we are not careful fund managers in New Zealand will just become post-boxes for foreign companies and distributors of imported product.
While New Zealand managers are easy targets for criticism (poor performance etc) they do develop good products. Take for instance the exchange traded index funds such as TeNZ and WiNZ. Exchange traded funds which have been in New Zealand for nearly five years are one of the hottest products in the huge US market this year.
There are two main risks to the funds management industry. One is a potential merger of the New Zealand and Australian stock exchanges. If this happens then it is a high probability all the analysts and managers will move across the Tasman. The consequences of that are that New Zealand companies will receive less attention from the investment market.
The future of the NZ Stock Exchange is too important to be left to the exchange and its members.
A second major concern is tax. New Zealand domiciled managed funds have to pay capital gains tax, while foreign ones don't. It's a no-brainer then that people will look favourably at putting money into Australian and UK based funds if they can avoid a 33% tax on capital appreciation.
One of the easiest things the Government could do is remove this impost from New Zealand funds - but neither this government nor the previous one show any inclination of taking this relatively simple step.
The main reason suggested in the industry for this lack of action is revenue loss. However, (although figures aren't known) it is thought the CGT tax regime doesn't actually raise a lot of revenue for the Government.
Other associated tax issues relate to the favourable treatment index funds enjoy and the fact that low and middle-income earners who put money into super funds are overtaxed on their savings.
It is encouraging to hear Finance Minister Michael Cullen tell the recent IIR-organised Funds Management conference in Auckland that he is looking at ways of addressing some of these problems. However, if positive steps aren't taken soon it may be too late to save the industry.
If the Government is serious about the savings industry you would have thought it would have invited appropriate delegates to the Business-to-Government gabfest in Auckland this week.
One positive step is the Government's plans to set up a major fund to prefund New Zealand Superannuation. This should in the long run be a plus for the industry as it is likely that a significant chunk of the money will be invested locally. The Government has two choices it can either outsource management to the private sector or it could establish its own funds management business.
On the face of it they may seem like a daft idea and one which stinks of empire building, but it's not beyond the realms of possibility. After all the Government does have already have some funds management skills in the local fixed interest areas through the highly regarded Debt Management Office. Also organisations such as the Government Superannuation Fund and EQC have managed some of their own funds in the past.
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