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FMA scores own goal with KiwiSaver tracker: Booster

[UPDATED] If the Financial Markets Authority's KiwiSaver Tracker was designed to make investors wary of higher-fee funds, it is not achieving its goal, one fund manager says.

Thursday, December 13th 2018, 6:00AM 3 Comments

The FMA has updated its KiwiSaver tracker, which shows fees as a percentage of funds' five-year average return.

Aggressive funds ranged from Mercer High Growth's 7.9% of return paid in fees to 17.2% for Booster's Geared Growth fund and 23.5% for NZ Funds Growth Strategy.

Growth funds varied from ASB's 5.5% to NZ Funds' Inflation Strategy's 21.3%.

Cash funds had high fee-to-returns ratios because their returns were so low.

When it was launched, the FMA said: "The link between higher fees and higher returns is, apart from in the case of a couple of standout funds, far less obvious [than the link between higher risk and higher return].”

But Booster's outgoing chief investment officer David Beattie said that was now not so clear.

He pointed to the scatter plot with the data which shows that all the lowest-fee providers have after-fee returns at 5% or below when averaged out over five years. 

But the best performers in the market hit 15%.

The highest performers after fees over the five years were the Quay Street New Zealand equity fund (15.1% return, 1.3% fee, OneAnswer International Share fund (14.5% return, 1.1% fee) and OneAnswer Australasian share fund (14.4% return, 1.1% fee).

“At best there’s no relationship and when all the funds are together there’s potentially a positive correlation between fees and returns. We wouldn’t disagree with that.”

The most expensive KiwiSaver fund was the Lifestages Growth Portfolio, at 2.8% fees and a return of 9.1% after fees, and NZ Funds Growth Strategy with 2.7% fees and 9.9% returns.

Booster’s Geared Growth fund also had fees of 2.7% but Beattie said that would soon change because it would no longer have to include its interest costs as part of the calculation. The fund borrows to leverage up its total exposure to equities. “They are not fees paid to us, they go to the bank as part of funding the facility.”

That would cut the fees recorded in half, he said. 

Beattie said the onus for anyone charging fees that were higher than the average was to justify how they were adding value.

“If you aren’t you will go out of business because investors will go to those who are better at proving they are adding value or who say they offer cheap fees and don’t add a lot of value. The evidence does not support the proposition that the higher the fee the lower the return after fees.”

He said when funds went into negative returns the percentage calculations would look meaningless.

“It’s useful to plot the return versus fees but not to portray it as a percentage.”

Tags: Booster FMA KiwiSaver

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Comments from our readers

On 13 December 2018 at 10:17 am greg bunkall said:
Anyone with an even a passing understanding of mathematics, managed fund investment return and analysis would have to agree with David on the fee tracker.

In regards not reporting interest costs in the management fee - that's fine, and makes sense - But it should be disclosed separately nonetheless, as should the transactions and operating costs of the fund. Lets investors see all the costs of investing and implementing that strategy, not just the management fees. US, Europe and Australia - this is commonplace, and should be here
On 13 December 2018 at 8:13 pm xlink_nz said:
I still find the Tracker a very good source of information. Even as is it shows funds with high fees can provide very good returns (excuse the pun!)
On 18 December 2018 at 1:36 pm wsarge said:
Is my understanding of what he said correct? clients have to pay the cost of borrowing from the bank - but booster wont have to disclose that as a fee so the fee they show client will be halved? from my understanding the fee to the client isnt being halved? its staying the same. Just because the fees arent going to booster shouldnt mean the cost isnt disclosed, it is still a cost the client is incurring because of boosters investment strategy.

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HSBC Special - - - -
ICBC 5.15 3.18 3.18 3.20
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