The Press

Clipping the ticket

Is your KiwiSaver manager taking you for a ride? Susan Edmunds reports.

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Some New Zealanders are being charged fees designed to reward their investment fund managers, even when the funds perform poorly, one analyst says.

Chris Douglas, director of manager research ratings, AsiaPacifi­c, at research house Morningsta­r, said performanc­e fees were an issue in the New Zealand market, including for KiwiSaver.

‘‘As a research firm, we believe there are a number of fund managers charging inappropri­ate performanc­e fee structures,’’ he said.

Performanc­e fees, which are designed to reward managers who provide good investment returns for their clients, should be structured so that they were tied to an appropriat­e measure.

That way they would only be charged when truly good performanc­e was delivered.

But he said there were some cases where fund managers decided their performanc­e fees by comparing their returns against an unrelated measure such as the official cash rate, plus a percentage.

That did not reflect the performanc­e of the wider market, he said.

In periods when equities were strong, those funds would be ‘‘creaming it’’ simply because share prices were going up, even if their own investing only delivered results that were barely above average for the market.

‘‘But they’re charging 3 per cent, 4 per cent or 5 per cent total fees . . . in some cases a fund manager can underperfo­rm all other fund managers and still charge performanc­e fees,’’ Douglas said.

He said it was not appropriat­e for KiwiSaver managers to charge a performanc­e fee. Performanc­e fees were originally designed to reward star investment managers, to stop them moving to another manager.

But KiwiSaver is long-term – so most investors will outlast any ‘‘star’’ manager being rewarded.

Of the KiwiSaver providers, Fisher Funds charges a performanc­e fee on its growth fund.

It takes 10 per cent of any return that is more than the official cash rate (currently 1.75 per cent) plus 5 per cent. The fee is capped at 2 per cent and the highest performanc­e fee ever taken by the fund was 1.4 per cent in the year to June 30, 2013.

Milford applies a performanc­e fee of 15 per cent on returns over 10 per cent in its active growth fund.

Fisher Funds chief executive Bruce McLachlan said his firm was required to apply reasonable fees and had been transparen­t about what it charged.

‘‘Clients understand that they only get charged performanc­e fees when they are doing well. Even if we are doing well compared to others, if the client is not doing well, there’s no performanc­e fee.’’

He said performanc­e fees were a way to align the motivation­s of a fund manager and clients.

Fisher Funds would report its returns after fees and taxes, he said, so members could compare the real results they were getting for their investment­s, compared to other providers.

‘‘They are in a position to judge whether they are getting value . . . our clients understand they are buying active management.’’

But Sam Stubbs, founder of lowcost KiwiSaver provider Simplicity, said performanc­e fees encouraged risky behaviour.

‘‘That’s because a manager is incentivis­ed to ‘shoot the lights out’ in a bull market, knowing that if it works they get the performanc­e fee,’’ he said.

‘‘There is little downside if the market goes sour. The investor may lose money, but the manager still gets their normal management fee.’’

He said the only benchmark that should be allowed was a comparison against competitor­s.

‘‘I get very disappoint­ed when managers charge performanc­e fees and bury them in fund returns. If some investors knew how much they had paid, they could be quite angry.

‘‘Our view on KiwiSaver performanc­e fees is that, if the manager wants to have them, they should work both ways. They should get them after delivering stellar results over – say – five years, and the manager should pay them back to the investor if they then under-perform. That’s fair, but I’ve yet to see anyone do that.’’

The FMA released guidance last year that described how performanc­e fees should be disclosed, saying that when a fund’s hurdle rate of return is linked to the performanc­e of a market index different to the comparativ­e index, this should be clearly disclosed so that prospectiv­e investors understand the implicatio­n.

Douglas said that had not led to a change in the market. He said a number of fund managers would have higher ratings from Morningsta­r if their fund structures were fairer.

An FMA spokesman said it was not against the law for performanc­e fees to be linked to an index other than the comparativ­e index.

‘‘In our guidance, we have said it is reasonable for the hurdle rate for performanc­e fees to be linked to the comparativ­e index. We have also said that where the hurdle rate is linked to something different, that should be clearly disclosed and explained. That remains our position.’’

He said where the FMA saw disclosure that did not meet legal requiremen­ts, it would engage with the fund manager to improve it. That was also the case when disclosure did not meet its guidance.

‘‘We expect providers to be able to explain to their investors why the hurdle rates and benchmarks they have chosen are reasonable. And we encourage investors to question their providers about that.’’

 ?? PHOTO: 123RF ?? One criticism of performanc­e fees is that they encourage risky behaviour, and it’s the investors who are ultimately the losers.
PHOTO: 123RF One criticism of performanc­e fees is that they encourage risky behaviour, and it’s the investors who are ultimately the losers.
 ??  ?? Sam Stubbs, left, and Bruce McLachlan
Sam Stubbs, left, and Bruce McLachlan
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