Clipping the ticket
Is your KiwiSaver manager taking you for a ride? Susan Edmunds reports.
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.’’