REGULARS | INVESTMENT COMMENTARY
The next regulatory rounds As NZ plays regulatory catch-up with other developed world countries David van Schaardenburg looks at further alterations which could meet and even exceed the investor experience overseas.
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ronouncements over the last 12 months from the Financial Markets Authority (FMA) have more often than not been focused on the new financial adviser rules. But the increased allocation of their resources dedicated to the oversight of investment management entities hints at likely new rounds of regulations relevant to the activities of New Zealand based professional investors.
Where might the FMA’s next investment focus be While New Zealand and New Zealand based investors became full participants in global capital markets in the mid1980s, oversight and regulation of New Zealand’s professional investors and financial advisers has notably lagged other developed world economies. Hence the regulatory catch up that has been occurring since the Securities Commission morphed into the FMA a decade ago. An example of a huge leap forward (“catch-up”) in the last decade has been the Financial Markets Conduct Act which amongst numerous positive (for investors and their advisers) new rules have been: •
fuller and consistent disclosure of fund fees
•
standardisation of disclosure of key fee, return and portfolio structure information.
28 | ASSET 03 | 2021
BY DAVID VAN SCHAARDENBURG
However, for the benefit of their investors, in my opinion there are still a number of important areas where New Zealand based funds management firms and their funds require further or altered regulation – in part to catch up with the investor experience in other developed economies but in some instances to maybe improve on them.
Fund returns advertising and promotion What does the past tell us about the future? In my career in funds management, past returns have been both equally useful and misleading as to the merits of a fund or its fund manager. This problem is exacerbated when looking at fund returns over short-term time frames. Frankly, when does a fund manager advertise the merits of a fund when they’ve done poorly? Never. So we know from the start that any fund return advertising is going to be selective in terms of either or both the investment time frame or the fund chosen. If you manage 20 funds there is bound to be several that have done well over some time frame. In their latest KiwiSaver report (March 2021), Morningstar agree with the need to use longer-term time frames in fund assessment: “It is most appropriate to evaluate performance of a KiwiSaver scheme by studying its long-term returns. Over
10 years, the …” By this statement it’s not unreasonable to presume that Morningstar believe a 10 year plus track record is more valuable in fund assessment than shorter-term periods. While not noted in Morningstar’s report, given KiwiSaver investors most often have multi decade investing timeframes, knowing what are the longterm return implications of each fund category is in most circumstances one of the most important decision inputs a KiwiSaver investor can have. For example, over the 10 years to March 2021, the average KiwiSaver growth fund has returned a 157% cumulative return post fees pre-tax (annualised fund returns ranging from 8.1 to 10.7% excluding one outlier) versus a conservative fund average of 75% cumulative return (annualised fund returns ranged 5.4 to 6.8%). My recommendation – promotion of fund returns should be over at least a five year period with two additional data points – what the fund’s market benchmark returned over that same period and what the previous five year fund versus benchmark returns were.
The DIMS anomaly Over the last decade anecdotally the funds invested via discretionary investment management services (DIMS) has grown enormously. While there is not official data of the quantum of funds advised under DIMS,
