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Fund history should reset after reclassification, adviser says

One financial adviser says it’s misleading that the fund that tops the Morningstar KiwiSaver growth category for five and 10-year returns was not in that category for the whole of that time.

Thursday, August 6th 2020, 7:00AM 4 Comments

Rachelle Bland

Milford’s Active Growth Fund reports a five-year return of 9.8% a year and 10-year return of 12.4%.

But adviser Rachelle Bland has taken issue with that because, until the first quarter of 2017, the Milford Active Growth Fund was classified as an Australasian equity fund, with 62.2% in NZ domiciled assets and 21% in Australia.

“Then, in Q2 2017, it was re-classified as a ‘growth’ fund, with 46.3% in NZ domiciled assets and 74.7% in growth assets. And after a single quarter of being classified as a growth fund, [Morningstar] report the fund as ranking for first place for three and five years. This is a blatant falsehood. The fund had only met the growth fund criteria for three months.”

She said, if a fund changed its investment mandate or made significant asset allocation changes, the returns quoted in reports should start from the date at which a fund met the criteria for a new category.

“It is disingenuous to include a fund’s prior earnings when it had a completely different investment mandate and investment allocation.”

She wrote to Morningstar: “You may doubt the significance of this issue, however in New Zealand there are little or no restrictions on Managed Investment Service licensees advertising based on past performance and Milford are currently running extensive media advertisements as being ‘Morningstar’s top ranking growth fund for ten years’, which is technically right, however puts the validity of your research into question.”

Tim Murphy, Morningstar’s director of manager research, questioned the suggestion that reclassification in 2017 was recent.

Murray Harris, head of wealth management at Milford, said while the fund had previously been categorised as an Australasian equities fund, it had always met the growth fund criteria in terms of its growth-to-income assets split, but had been classified in the Australasian specialty category because of Brian Gaynor's focus on local investments.

But as it became more diversified, with more global investments, it had moved out of the specialist category.

“It has always had a 75/25 or 80/20 growth to income mix. It has always met the KiwiSaver growth allocation.”

Tags: KiwiSaver Milford Asset Management Morningstar

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Comments from our readers

On 6 August 2020 at 9:27 am greg bunkall said:
Hi Rachel, Further to Tims comment - We have extensive data on this fund going back to its inception - we know a tonne about it, and the team who manage it. Probably as much as any fund on our database. It has been adding international exposure to the strategy since the very early part of the decade. There has been no sudden change of strategy or underlying holdings that we would consider a 'significant restructure' that would render its performance history obselete in the contect of the category change. Our significant restructure regime follows the european fund association guidelines, and is based on best practices built up over years of managing cross sectional fund databases at Morningstar and other like firms. Its a very heads up decision, and one we are confortable with. Many tools we offer allow advisors, consultants and asset managers and the like to pick and choose thier own peer groups for thier own liking and detrmine thier own views- This may be something you want to consider. There is no perfect answer to performance history, presentation and categorisation, its more art than science - but we believe that using well considered international industry best practices is a good option to apply to this market in the absence of any local guidance! Thanks for the feedback nonetheless Rachel, its a great debate to have.
On 6 August 2020 at 4:24 pm Mr UCITS said:
I see this as more of an issue of naming convention. I love global best practice (especially when its European UCITS related), so maybe it’s time to apply a bit of that here... I'm sure Morningstar is familiar with SEC rule 35d-1 which was introduced in 2001 for US mutual funds and is currently being updated. Rule 35d-1 is the SEC rule on fund naming convention and states a fund must invest at least 80% of its assets in the thing its name suggests. So, an “Australasian Equities” fund would at all times have to invest at least 80% in shares of Aus and NZ companies. This would be a monitored investment rule like any other rule. Obviously, we’d need to do a bit of work to adapt the SEC rule to the NZ market (which is dominated by multi-sector funds as opposed to the US market which is predominantly single-sector funds). We’d also need to have rules around fund reclassifications, but the point is the regulation already exists in another jurisdiction so could easily be adapted and adopted here.
On 7 August 2020 at 12:10 pm greg bunkall said:
The reason we group funds together is to avoid needing naming convention concerns - we would never categorise on name, and I dont personally see egrarious misuse in that respect by managers here - its probably just a bit messy if anything. That being said, I am particulary keeping an eye on this piece of work being done in Australia - It will likely create a model to standardise how asset managers treat/assign various asset classes - That will then force market participants into a more standard communication language and comparative landscape. If it works there, I cant see why similar work cant be done here.
On 7 August 2020 at 1:54 pm Muddy Waters said:
Classic investment industry smoke and mirrors, ball and cups. Super returns earned when the fund was an Australasian fund. The 'new' fund is not Australiasian, yet claims the returns history from when the mandate was Australasian. Describing this move as disingenuous is being generous. Well done Rachelle Bland for calling this out.

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