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Size of market keeps fees higher

There are claims it is hard for New Zealand based-passive funds to get the scale to offer the low fees available on international ETFs.

Thursday, December 11th 2014, 6:00AM 5 Comments

by Susan Edmunds

NZX operates the index-tracking Smartshares funds, and this week announced it had registered a prospectus for two new ETFs – the Australian Property Index Trust and the Australian Dividend Index Trust.

Smartshares also announced it had bought the SuperLife business headed by Michael Chamberlain.

But New Zealand advisers who opt for passive strategies were not convinced the new funds would entice them to move to NZX.

Adviser Wayne Ross said he used international index funds for clients. “We can gain the benefit of market or beta exposure for very low cost. We don’t use NZX funds and the main reason for that is cost.  Efficient index investing is all about scale and hopefully the new purchase will allow NZX to build scale and review the cost structure for its NZ/Aussie focused funds. “

He said another option for NZX was to look at how they might package up low-cost international assets specifically for New Zealand investors, to gain the benefit of currency management or the PIE regime.

“However that probably doesn’t help them generate more flow through the domestic market which is obviously a key driver for them as well.”

Sam Stanley, head of exchange products at NZX, would not comment on the Superlife deal or whether it would give the scale required to lower fees.

But he said he had heard concerns about the passive funds’ fees before.  “A lot of it is an educational process with advisers.”

He said advisers had often heard of big US products charging 10 or 15 basis points. Smartshares charges 60bps or 70bps, depending on the fund. “With the scale-driven model that all fund managers operate under, we simply can’t have a product which is at 20bps, no one does. We have the lowest fee in the New Zealand market. People expect them to be lower because they are ETFs and they should be lower [than active funds] and they are low but we still have to pay the same costs for custody, regulation, administration, trustees… we have to pay that like everyone else.”

New Zealand ETFs needed to be looked at in a local context, not compared to international products, he said.  He said as SmartShares acquired more scale it might be possible to look at lower fees. “Fees make a massive difference over a long-term investment horizon for most people.”

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Comments from our readers

On 11 December 2014 at 8:40 am MPT Heretic said:
If the NZX is serious about growing their presence in the NZ market they might want to educate themselves a little better as to the investment options available to NZ investors and their advisers. Charging a 'higher' mgmt fee + entry costs and earning revenue at the expense of investors by stock lending and earning interest on dividends are all part of the reason why they have struggled to attract support from 'uneducated' advisers..
On 11 December 2014 at 11:19 am Pragmatic said:
Welcome to the global platform where local providers will increasingly compete against large foreign players - both in active & passive solutions. Sadly for the NZX cheaper passive alternatives are well established for those seeking passive exposures
On 11 December 2014 at 3:34 pm Pragmatic said:
Is it just me - or is there a conflict of interest in a Regulator also owning a Funds Management business?
On 11 December 2014 at 10:39 pm b p said:
Pragmatic - what evidence have you seen that NZX acts a regulator?
On 12 December 2014 at 6:28 am Pragmatic said:
Rf: nzx.com
"NZX is responsible for monitoring and enforcing the rules under which NZX’s markets operate. This applies directly to issuers, market participants and indirectly (through market participants) to investors."
"NZX is also responsible for developing and enhancing the market rules, practices and policies under which NZX’s markets operate."

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