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Morningstar survey a nightmare for managed funds

New Zealand has been rated as the worst country to be an investor in managed funds due to a lack of tax incentives, poor regulation and disclosure.

Tuesday, March 15th 2011, 7:15AM 4 Comments

by Benn Bathgate

New Zealand came last out of 22 countries in the Morningstar Global Fund Investor Experience Survey with a D- rating, the same grade as in the initial Morningstar study in 2009.

The study assesses key elements of the fund investor experience across different countries using four categories; regulation and taxation, disclosure, fees and expenses and sales and media.

Each category was  given a grade, and category scores were added together to produce an overall country grade.

New Zealand scored well in the area of fees and expenses (B), with Morningstar citing the review in progress of fees, commission structures and related issues by the Ministry of Economic Development, Securities Commission and the creation of a single regulator, the Financial Markets Authority (FMA).

"These have the potential to make the New Zealand investment environment more favourable for managed fund investors," said Morningstar.

"The study notes that fees for New Zealand funds appear to be comparatively low, although the lack of uniform standards in the calculation and disclosure of fees for New Zealand managed funds remains a major issue."

New Zealand scored poorly on the remaining three categories, with a C+ for sales and media, D for disclosure and a D+ for regulation and taxation.

Morningstar highlighted disclosure and taxation issues as being of special concern.

"New Zealand scored comparatively poorly in regulation and taxation. Unlike a number of other countries, there are no tax incentives in New Zealand for encouraging long-term investing, as there are no tax concessions for long-term rather than short term gains. Additionally, the complex tax system in New Zealand effectively causes investors to pay taxes on unrealised capital gains as well as realised gains on foreign holdings."

Morningstar was also critical of the disclosure regime in New Zealand.

"New Zealand scored very poorly in the areas of disclosure, principally because fund managers are not required to disclose comprehensive fund portfolio holdings on a regular basis. New Zealand and Australia remain the only two countries in the 22 studied where this is the case."

However, the Morningstar co-head of fund research for Australasia, Chris Douglas, said the prognosis wasn't necessarily bleak for New Zealand.

"This survey is about the fund investor experience rather than actually the result on fund managers in New Zealand, so it's a pretty important point to make that differentiation. A lot of people see this and think fund managers in New Zealand are the worst in the world and that's just not true at all," he said.

He agreed with the survey's view that a lot of groundwork currently under way in New Zealand bodes well for the future.

"In many ways this is just really poor timing for the New Zealand industry. There's so much discussion and debate going on, a true mandate for change at the moment, I think, for incorporating global best practices. But at the same time this is a great indicator to the New Zealand industry about where we sit in the global scheme at the moment."

On one of the survey's most critical points - the tax treatment of managed funds in New Zealand - Douglas was also more optimistic.

He said with the PIE system, fair dividend rates, legacy managed funds and non-PIEs, "it looks like quite a complex tax system."

"But the reality is that for the investor in a managed fund the tax is all done for them by the fund so they don't have to go and make this complex tax return statement."

When it comes to the effective tax rate, Douglas said in fact New Zealand fares better than the initial survey results suggest.

"The area I liked most out of this survey was the effective tax rate example where it just had a consistent scenario for everyone in the 22 countries and it shows what the effective tax rate they'll be paying, and in that case New Zealand is at 16 or 18%, very much the middle of the road and I think that's not too bad."

Out of the 22 countries surveyed by Morningstar Singapore and the United States were identified as the most investor-friendly managed fund environments, with both countries scoring an A rating.

Given the changes mentioned in the survey - such as the launch of the FMA - Douglas believes New Zealand will inevitably climb up  the rankings at the next survey.

"When you look at the proposals the regulator, the Ministry of Economic Development and the Securities Commission have put in place there's some great initiatives in there that will definitely increase New Zealand's score."

Benn Bathgate is a business reporter for ASSET and Good Returns, email story ideas to

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Comments from our readers

On 15 March 2011 at 9:27 am Nick said:
This is a nonsense. Having lived in the UK, US, and NZ the managed funds industry is far better here. The PIE regime alone is a simplified tax regime (compared with the US and UK, both of which having appauling complicated tax systems - particularly for managed funds). The lack of regulation, in this scenario, seems to be a bad thing, when in reality we have a lot more freedom of choice and a lot less prescriptive nonsense that nobody bothers reading (something I explain to staff when looking to join KiwiSaver - you have a choice of what people tell you). Then we're told that because we don't incentivise long-term gains, compared with short-term gains, we're somehow doing a worse job than countries with extremely complicated and manipulative capital gain tax systems? A survey says that NZ is a D-, but seems to then say the US (with one of the most burdensome tax and regualtory systems in the world) is somehow the best is a nonsense. Might as well say that NZ is a D- place to live because our air is too fresh tasting and doesn't have that nice regulated flavour.
On 15 March 2011 at 10:48 am Independent Observer said:
I made a comment when this report announced that the Chinese asset management industry was superior to the NZ asset management industry back in 2009. After delving into this I discovered that the author of the report had not been to China, and that the preparation of the report was binary in nature. Whilst this approach produces efficiencies and captures headlines, it is both misleading and potentially damaging. As noted previously, research is not a tick-the-box procedure, and requires significant more insights before it can be respected and relied upon. The alternative is to continue producing sensationalist articles that advance a brand at the expense of the industry it serves.
On 15 March 2011 at 12:55 pm Murray Weatherston said:
Its pretty rich to slag an industry because of the tax and regulatory environment imposed upon it by its national authorities.

Surely an inter-country comparison should be restricted to things that the industry has within its own control.

I suppose Morningstar must be looking for consulting opportunities to help the NZ industry get a better grade.

Or are they suggesting that the industry emigrate - shut up shop here and re-establish in one of the A grade countries?
On 15 March 2011 at 1:41 pm Dave said:
The Morningstar "Global" survey did not include Luxembourg (the world's 2nd biggest funds domicile behind the US and the world's biggest exporter of retail mutual funds)or Ireland (the world's biggest hedge fund domicile and 2nd biggest exporter of retail mutual funds). Why on earth would you conduct a global fund's survey and exclude 2 of the largest and most influential jurisdictions?

Morningstar NZ's submission to MED on KiwiSaver disclosure is also an interesting read. Throughout it they suggest that NZ follow/adopt a number of Australian standards. Australia was rated 3rd to last on the global survey.... not an overly aspirational goal from Morningstar NZ.
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