The FMA has published the findings of a review of quarterly fund updates which looked at whether fund managers were meeting their legal requirements to produce updates that are both easy to find and easy to read for investors.
At least one quarterly fund update from each licensed Managed Investment Scheme (MIS) manager was considered as part of the review.
MIS managers were complying with the general obligation to produce fund updates and most updates did not raise significant concerns, the FMA said.
The review did find some areas where disclosure could be improved or instances of potential non-compliance. In a handful of cases, the fund update could not be found on an issuer’s website. In other cases, it was not sufficiently prominent.
While the majority of fund updates did not report fund charges significantly higher than estimates provided in the product disclosure statement, four funds had a significant difference in fund charges when compared to the estimate in the PDS.
The FMA said 17% had a fund update that included fees materially higher (+ 0.15%) than in the PDS, or 9% after excluding funds where the PDS was subsequently updated.
It found in some cases that was due to performance fees being higher than expected.
It found 11 instances of performance fees being charged. "While a full analysis of all funds a MIS manager offers was not completed, at least four of these 11 instances had ‘high risk’ features such as high-water mark resets or a hurdle rate of return of nil."
A spokesman said those features were not regarded as best practice.
“Where these features are present, the PDS regulations are drafted in a way to highlight these features. For example, they require a PDS to specifically state if there is not a hurdle rate of return, or if a performance fee may be paid even if the fund does not achieve the return of its market index.
"In terms of a hurdle rate of return of nil, the hurdle rate of return is the minimum rate of return that must be earned in the relevant calculation period before a performance fee is payable. A performance fee is payable on the excess return above the hurdle rate of return. If we have noticed a hurdle rate of return of nil, then this means a performance fee is charged on the entire performance of the fund, rather than what the fund manager is delivering above and beyond market performance.
"On the issue of high-water mark resets, the high-water mark is the highest unit price or net asset value per share achieved at the end of any performance fee calculation. No future performance fee is payable until the high-water mark has been exceeded. High-water marks apply to ensure that past underperformance is recovered prior to the accrual of any future performance fee."
"If there is a reset provision, it enables the manager to re-establish either the high water mark or the hurdle rate of return, thus making it easier for the fund manager to earn performance fees.”
The FMA says it will work with managers to address the issues uncovered by the review.
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