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FMA tool ignites fee debate

The Financial Markets Authority is being told its KiwiSaver Fund Tracker tool needs a longer timeframe than five years if it is going to make meaningful statements about funds’ performance.

Tuesday, November 28th 2017, 6:00AM 1 Comment

The tool uses the quarterly data from KiwiSaver providers. It shows the risk profile, returns and fees for each fund, a percentage figure for how much of the return is paid to the manager in fees, and how much is paid to investors.

The data covers the past year and average five-year returns.

David Beattie, chief investment officer at Booster, said the tool would only be useful after a full cycle of the market. KiwiSaver had ridden out almost a complete decade of a bull market, which favoured low-cost, passive operators. 

“It’s not the easiest proposition to outperform when it’s all going up if you are an active manager or have an active part of your portfolio. That’s the piece that increases the cost.”

Booster's geared growth, international share and trans-Tasman share funds showed relatively high fee takes - up to 16% of returns paid in fees.

Beattie said the more expensive funds would start delivering value for money when markets went down.  “I’m very confident that those funds that do have an active component ... will protect a lot of downside when the market is going down.”

He said a five-year period was “never going to be long enough”. “Even 10 years isn’t, when you’ve had a 10-year bull market.”

Morningstar director of manager ratings, Asia-Pacific, Christopher Douglas, said the tool might create the impression of too clear a relationship between fees and returns.

“They’ve worked on a five-year rolling return timeframe. Performance will ebb and flow over that time period,” he said.

A particular asset class might do better and benefit some managers, making them look like they were providing cheaper returns.  Others might go through a slump where their fees looked more expensive.

He said it also obscured the fact fees were paid on the total investment value, not returns.

“But it’s a very noble thing the FMA is trying to do,” he said.

“We do know that fees are very important – one of the things we always say to clients and anyone who’ll listen is that they are the one constant you can guarantee when investing and obviously the cheaper they make it for investors the better. Our question is about the relationship people might start to think about when it comes to returns and fees.”

FMA spokesman Andrew Park said the most consistent, standardised and accurate data available was over a five-year period.

"While we absolutely understand the appeal of longer periods, we are considering how we can introduce longer reporting periods as we develop the tracker," he said.

"As the tracker automatically updates in future quarters, it will naturally start to show longer time periods. It is also worth remembering that the tracker is not the only tool currently available with fees and returns information and some of those tools hold information for longer periods.
You can also check the individual funds on the provider's website or on the Disclose register to see how far back they report those individual funds."

While the FMA warns that past performance is no guarantee of future returns, AUT researcher Ayesha Scott said the tool risked undoing some of that message.

"You should remember that just because your fund performed well (or not) doesn’t mean they will do so again. This is because there is no evidence that good returns persist – this means that past returns are no guarantee of future returns.”

She said it was most important that investors were in the right type of fund for their circumstances.

“You should choose the correct fund type for your situation, be it conservative, balanced or aggressive. This means, in general, you’ll be in a fund with an appropriate level of risk for your situation. Then, choose the low fee option,” she said.

“Bottom line: Choose your fund type, then choose the low fee option.”

Other funds that showed higher-than-average fee takes were Fisher Funds Two - Equity, Kiwi Wealth Growth, Lifestages Growth, at 22% of returns paid in fees, Mercer High Growth, NZ Fund's Growth Strategy, OneAnswer's Australasian Property and Australasian Share, QuayStreet International Equity, SmartKiwi Growth , several Superlife funds and Westpac's CPP funds.

Tags: Booster David Beattie fees Fisher Funds FMA investment KiwiSaver Mercer Morningstar QuaySt risk Superlife Westpac

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Comments from our readers

On 28 November 2017 at 10:47 am Brent Sheather said:
Very much agree with Ayesha Scott’s comment that the FMA risk undoing some of the “past performance is no guarantee of future returns” message. Five years is a ridiculously short timeframe and made all the more ridiculous by the fact that the performance of virtually every asset class has benefitted from falling interest rates over the period. The FMA clearly have no knowledge of the Gordon Growth Model or they wouldn’t have gone down this track. Very disappointing that the FMA would encourage short term performance chasing.

Mr Beattie’s comment that the bull market has favoured passive operators is also wrong. The bull market has favoured high cost operators because high returns mask the impact of high fees. In a low return environment low cost operators will find it easier to outperform. Mr Beattie suggests that “more expensive funds would start delivering value for money when markets went down”. The facts don’t support that conclusion - research by Vanguard shows that that is not the case. It will be interesting to see how Mr Beattie’s geared funds cope with a downturn. Research by many academics show that market timing doesn’t work yet that’s the competitive advantage that Mr Beattie suggests active managers bring to the party. Ok, not.

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