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Ratings tool criticised

A research firm that hands out star ratings to KiwiSaver schemes has been criticised for its fee-focused approach that, according to one provider, unfairly favours the banks.

Tuesday, March 5th 2013, 6:00AM 13 Comments

by Niko Kloeten

Grosvenor head of marketing and business services Andrew Lendnal has questioned the methodology of Canstar, a research firm that rates a number of other financial products including home loans, KiwiSaver schemes, term deposits and credit cards.

Canstar bases 70% of its KiwiSaver ratings on fees, with the remaining 30% on features such as investment options, account access and communication.

ASB and Superlife both received five-star ratings in all three categories (conservative, balanced and growth), while the award-winning Milford Asset Management scored only three stars.  Grosvenor’s funds were awarded two stars.

Lendnal said the value of the survey was minimal because of its heavy focus on the fee aspect, with factors such as fund performance ignored.

“The analysis they do is based on fee structures… if you are ASB yes you will have cheap fees and you’ll be right at the top.”

Canstar New Zealand general manager Derek Bonnar said:  “While performance is not guaranteed, fees are known and do have an impact on the final retirement benefit of KiwiSavers.  A small difference in fees can have a substantial difference on the final retirement savings of the individual investor.”

Canstar’s doesn’t measure fund outperformance, although it looks out for persistent underperformance as this can be an “indicator of broader management or systemic issues which may be impacting the investment performance,” Bonnar said.

“We have taken the decision not to make a judgement on the sustainability of investment returns,” he said.

“While we recognise that some fund managers have outperformed the market, there is a wide range of research which indicates that the majority of fund managers cannot persistently outperform a benchmark over the long term i.e. 10-plus years.

“Given that KiwiSaver is not only a long-term investment but a lifetime investment, consumers cannot reasonably rely upon current top performers sustaining that position.” 

Diversified director Norman Stacey, who manages the Law Retirement KiwiSaver Scheme which received a one-star rating, said he wasn’t familiar with Canstar and wasn’t aware of his scheme’s low rating.

But he said the proliferation of different ratings systems with different methodologies could cause confusion for investors.
“It must be hugely confusing; everyone claims to be fund manager of the year.”

Niko Kloeten can be contacted at niko@goodreturns.co.nz

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Comments from our readers

On 5 March 2013 at 6:21 am Bazza said:
What are the purpose of the ratings? To help people pick a product. The product can't guarantee future returns therefore hard to rate. The only certainties are the product structure fees and benefits. Long term investment returns are likely to even out across managers with traditional asset class funds that are conservative/balanced/growth (which would include the bulk of the default funds.) Specialist funds and fund managers are a different story and you would be better looking at fund/fund manager ratings rather than a product rating. Therefore these ratings are probably relevant to help a consumer comparing product.
On 5 March 2013 at 8:07 am traveller said:
The old story. Would you rather have a net return after fees of 6% after fees of 2% or a net return of 5% after fees of 1%. Fees are a consideration but the net return is more important. The average punter just doesn't get it.
On 5 March 2013 at 11:17 am Brent Sheather said:
Duh, this is not the old story . This is the story. Fees impact returns. Look at a quote from an unbiased expert Debbie Harrison, Senior Visiting Fellow of the Pensions Institute at the Cass Business School who said “there is little academic evidence to support the argument often heard from advisers that asset management and the potential for outperformance is more important than cost”. The sooner advisers get to grips with reality the sooner this business will become respected. Until then it seems like we will have to put up with this sort of nonsense. You cannot predict which fund manager is going to outperform but numerous studies show that the higher the fees the lower the performance, ceteris paribus. Fact. Pity this sort of stuff isn’t taught in AFA courses or CPD. Huge indictment of some members of the Code Committee not to mention all the dodgy industry groups.
On 5 March 2013 at 12:55 pm Camino said:
No doubt fees have a massive impact on long term performance. I think the problem with Canstar is they don't judge all providers equally, hence the disclaimer "Additional fees/tiers may apply". Also the set administration fee a lot of providers have will have different impacts on varying balances. It really stresses the need accurate and comparative method of assessing fees.
On 5 March 2013 at 7:59 pm Eric Simpson said:
The issue with these things is that:
a) not a lot of intelligence or analysis goes into these ratings
b) the agency that presents these awards then charges sucker firms five figure sums to promote them.
c) the public has no idea what the gong is for or how it is awarded. They just see this thing which appears to give the scheme credibility.
Frankly they are a joke.
On 6 March 2013 at 7:45 am Independent Observer said:
Brent - you are wrong. A bit of common sense tells you that "Traveller" understands that investors are only interested in what they get in their hands (ie: after fees returns).

Most investors would happily pay a premium for net returns that are in line with their expectations (ie: the risk premium).

The problem with some studies in this area, is that they focus on the whole universe of funds available, without screening out those that are most interested in managing their business risk in preference to delivering returns.
On 6 March 2013 at 12:08 pm Brent Sheather said:
RE: Independent Observers comment

That may be true but it ignores the fact, rehearsed by the Economist Magazine, the Financial Times, the FSA blah blah blah that fees impact returns. I must say that I do agree with your last comment – that if you screen out all those fund managers that underperform you will get a very good result for fund manager performance relative to an index! Reminds me of a female fund manager who was quoted not so long ago as saying that her portfolios would have had a very good year had they not owned a few stocks which went down! This really is a fun industry to be in! Regards Brent
On 6 March 2013 at 12:39 pm Dirty Harry said:
I bought a bottle of Wine a few weeks ago. It had a little gold sticker on it proclaiming it had won an award from some magazine for being red fluid of the week or whatever; and another little silver sticker saying some wine taster "recommends" it.

It did what it said on the label - when I opened it it was wine. But it wasn't very nice.

A bit like some of these fund ratings and awards, really.
On 6 March 2013 at 2:47 pm Graeme Tee said:
Re Independent Observer comment.
Of course everyone is interested in after fee returns but common sense also tells us we only know this after the fact. i think you find that the fund manager who is going to deliver superior after fee returns is a bit difficult to select beforehand. Unless that is you can actually pick the ones who look after their own interests first, are there any left after that process?
On 8 March 2013 at 3:23 pm Mark Jory said:
A couple of points to consider in this debate: -

If you pay peanuts, you get monkeys!

A slightly better net return over many years can also make a huge difference!
On 12 March 2013 at 12:59 pm Independent Observer said:
Graeme Tee: It's not that difficult to find managers, with healthy after-fee returns over various cycles (ie: it's important not to jump on the band-wagon after a ripper market / market segment).

The best starting point is to eliminate those Managers who have failed to deliver. I reckon that Brent Sheather could give you a hand there... as its the majority of Funds that are on offer in the NZ industry (apologies to the handful that are delivering). Next - ensure that the Manager has a vested interest in delivering your success... or to put it another way: is not asset gathering, or planning to bail when they've attracted enough FUA.

The last bit, is to keep an eye on them. Most quality Managers will cap their FUA, and then go to great lengths to ensure that their clients are aware of their actions.

Hope that helps - as it's comments like "....with the benefit of hindsight..." that ignore the robust capabilities that are available.
On 30 July 2014 at 12:48 pm Robbie said:
These ratings places like Canstar are simply in it to sell awards to the winning brands and in some cases charge brands to be included. The research methodology looks flimsy at best, it does not reflect what consumers look for in a KiwiSaver and seems to be all configured around generating results that deliver the best commercial return (aka selling the licenses to the banks). These awards are meaningless and consumers should start to boycott these types of dodgy awards from Canstar.
On 31 July 2014 at 2:07 pm Mac said:
Canstar knows the price of everything but the value of nothing (with apologies to Oscar Wilde)

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