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Funds not 'true to label': Researcher

When is a 'balanced' fund not a balanced fund? When it takes the risk of a growth fund, one researcher says.

Thursday, September 7th 2017, 6:00AM 2 Comments

by Susan Edmunds

AUT professor of finance Bart Frijns wrote a research paper in which he said the way KiwiSaver funds' risk levels were described could be misleading.

"When you look at the risk profile of a 'balanced' fund, there was a very large dispersion in the risk profile that those funds have. Some balanced funds turned out to be more risky than growth funds," he said.

"This different level of risk exposure by funds indicates that in the long-run investors in such funds could end up with significant differences in the values of their final portfolio endowment.”

He said it required more transparency from KiwiSaver providers.

When a fund said it was a particular style of investment, investors needed to be able to look at the risk profile and see how it could be expected to perform. 

"Some detailed classification or risk scale would be really helpful for people. There are very easy ways to measure these things. But it's something a normal investor doesn't readily understand. Some standards need to be set."

Providers are now required to use risk indicators in their reporting to clients but these have been criticised because they are based on volatility experienced over the previous five years.

Tim Murphy, Morningstar director of manager research, said his firm categorised funds according to their asset allocation, not what they were called.

But he said it was not common for funds to end up in a different category.

Nikko, ANZ, Booster and OneAnswer all have balanced or balanced growth funds that end up in Morningstar's growth category.

Booster, Generate, Fisher Funds, Kiwi Wealth and Mercer all have growth funds that Morningstar categorises as aggressive.

"It's a bigger issue in Australia," Murphy said.

He said Morningstar would consider a growth fund one that had between 60% and 80% growth assets. But over time a 60% growth fund would be expected to have a different outcome to an 80% one.

David Boyle, group manager of investor education at the Commission for Financial Capability, said it was a function of New Zealand having a smaller investment market.

"There is a challenge around making sure everyone is true to label. Part of that is because of the number of funds in the market."

It should be expected that would change over time, he said. "It's worth noting and being aware of."

Richard James, chief executive of NZ Funds, said he did not see an issue. "The rules around fund names and descriptors and the risk indicators are pretty robust."

Tags: ANZ Booster Commission for Financial Capability David Boyle Fisher Funds Generate investment kiwi wealth KiwiSaver Mercer Morningstar Nikko AM NZ Funds Richard James risk

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Comments from our readers

On 7 September 2017 at 7:59 am Brent Sheather said:
Excellent work from Professor Frijns. I came to the same conclusion recently – there is a huge disparity in the asset allocation of balanced funds but the differences don’t just relate to asset allocation. One balanced fund I looked at had a very low quality bond portfolio whereas most have an average credit rating of AA. BBB might outperform in the good times but as we all know when it all turns to crap the bond market bifurcates.

The other issue in this story is the consistent lack of intelligent comment from the CFFC. This issue has nothing to do with the number of funds – it’s simply that many of the players just aren’t up with the play. Armstrong Jones has a lot to answer for.
On 7 September 2017 at 9:35 am Dirty Harry said:
David Boyle, group manager of investor education at the Commission for Financial Capability, said it was a function of New Zealand having a smaller investment market... ...part of that is because of the number of funds in the market."

Which is it?
Lots of Funds? (big market)
Or not much $funds? (smaller market)

So a bigger market (lots of Funds) makes it hard to make sure everyone is "true to label", but a smaller $Funds market makes it hard to make sure everyone is true to label.

Got it.

There are lots of chemists in town.
They have lots of drugs drugs at every chemist. I believe the people who work there are knowledgeable and qualified and has a good understanding of the contents of every bottle. And they are able to know with absolute confidence that every drug on their shelf is true to label.

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