By Amanda Morrall
For the second year in a row, New Zealand has been flunked for failing investors of managed funds on a number of levels including poor disclosure, lax regulation and unfavourable taxation.
Investment research house Morningstar, in its second Global Investor Experience study, gave New Zealand a grade of D minus, scoring it worst overall among 22 countries. Singapore and the United States shared first place for the 'most investor-friendly managed fund environments' each receiving A grades.
Australia by comparison came in 15th place with a grade of C, just behind the United Kingdom.
While Morningstar acknowledged there were changes 'on the horizon' in terms of disclosure and regulation rules, researchers said tax structures were "relatively unfavourable to fund investors in New Zealand." (See full report here.)
Investment management consultant Anthony Edmonds said criticism of unfavourable tax environment was unfair.
"In many cases managed funds provide better tax outcomes than investing directly because with PIEs (personal investment entities) individuals are taxed lower than their marginal tax rate. So to that extent tax incentives exist for managed funds.''
Edmunds said KiwiSaver was also attractive from a tax perspective because of the built-in $1,043 a-year tax credit component.
Stephen Leslie, communications manager for the Investment Savings and Insurance Association (ISI) said the grade was harsh but unsurprising.
Leslie said major changes facing the managed funds sector in New Zealand had yet to make their way into practice since Morningstar's first unflattering report card in 2009.
"We took note of their report last time and took steps to make improvements in the areas where they've marked us down...Things have been a little bit slow in terms of getting these things rolled out for a variety of reasons.''
Among other changes in the works, the ISI (which represents fund managers and life insurers) is looking at some standardised reporting methods around investment performance and portfolio holdings.
Morningstar's evaluation of investor experience (based on publicly available information and interviews with analysts) was not performance based. Instead, the research house graded participants on four separate areas (regulation and taxation, disclosure, fees and expenses, and sales and media) and then combined the score.
D for disclosure
While New Zealand scored a B on fees and expenses, it fared comparatively worse in sales and media (C+), disclosure (D), and regulation and taxation (D+). Key findings were summarised as follows:
- The study noted that fees for New Zealand funds appear to be comparatively low, although the lack of uniform standards in the calculation and disclosure of fees for New Zealand managed funds remains a major issue.
- Sales and marketing practices were considered average. Coverage of managed funds in the New Zealand media was also considered typical in terms of frequency of coverage and content.
- New Zealand scored comparatively poorly in regulation and taxation. Unlike a number of other countries, there are no tax incentives in New Zealand for encouraging long-term investing, as there are no tax concessions for long-term rather than short-term gains. Additionally, the complex tax system in New Zealand effectively causes investors to pay taxes on unrealised capital gains as well as realised gains on foreign holdings.
- New Zealand scored very poorly in the area of disclosure, principally because fund managers are not required to disclose comprehensive fund portfolio holdings on a regular basis. New Zealand and Australia remain the only two countries in the 22 studied where this is the case.
U.S. still top of the class?
In reconciling America's top grade with Bernie Madoff-size scandals in the investment sphere, Morningstar gently acknowledged some weaknesses, namely in the area of regulation and taxation, individually graded at a C+.
"The U.S. Government bodies assigned with investor protection have struggled to identify violations in a timely manner, such as the Madoff ponzi scheme. Additionally, the United States is one of the only five countries to tax fund investors on capital gains earned within fund shares."
Morningstar further notes that tax rates for short-term capital gains in the U.S. were among the highest in the study.
The overall letter grade assigned to those evaluated was arrived at by combining the individual scores on four separate areas: regulation and taxation, disclosure, fees and expenses, and sales and media. The study was based on publicly-available information and interviews with Morningstar analysts.
Morningstar's stated aim of the study is to 'identify best practices in managed fund investor experiences, highlighting both strengths and weaknesses, to help fund managers, regulators, and market commentators focus on and enhance best practices for investors.
Leslie, with the ISI, said he was hopeful that New Zealand's score would be much improved in the next evaluation.
Here's the rankings in descending order.
Singapore: A
United States: A
Thailand: A-
India: B
Netherlands: B
Switzerland: B
Taiwan: B
China: B-
Sweden: B-
Canada: C+
France: C+
Germany: C+
Japan: C+
United Kingdom: C+
Australia: C
Belgium: C
Hong Kong: C
Italy: C
Norway: C
Spain: C
South Africa: C-
New Zealand: D-
(Updates with comments from Investment Consultant Anthony Edmonds)
12 Comments
The way I read that is that the D- relates to the regulatory environment (i.e. the responsibility of the government) not the performance of the funds/fund managers themselves.
You would think with an ex market trader as the PM these matters would have been addressed far earlier in the Nat Gov't's first term. Instead JK took the tourism portfolio - and gave Dunne (of all people!) one of the more important of the finance portfolios. Makes you wonder.
@blackcelebration: Well no, but all of the people I know who have property portfolios are not doing it thru a scheme such as Blue Chip etc. They purchase & manage their own rental properties. So they feel in control, as opposed to thru the managed funds industry. They are able to bypass the cowboys.
I am not being one of Olly's or the REINZ's property fans here. I bury my head in my hands at despair about how NZers put all their $$ into property, rather than productive enterprises. To the detriment of the economy.
Unfortunately, Govt policy that allows tax-free capital gains, LAQCs, etc; plus fails to have effective regulation of equities and management funds in NZ, effectively drives investors into property.
Thanks for your response to my posting, cheers to all.
But Philly, the D- isn't to do with the private sector institutions' competence or otherwise - the measures relate to the regulatory/tax environment withinwhich our investors must operate. Generally my impression is that most KS managed funds have enjoyed good returns relative to their specific investment target areas (well 'good' in the sense that for the majority they mirror or better the overall trend globally of those markets).
@ Kate
Key wasnt really a 'trader" in the way the majority think.
Working for Merrill Lynch he didnt use his own money and would have had the ability to front run markets. His wealth is probably from fee's. Any one can do that, with insider deals, other peoples money and fantasy derivatives. Merrill Lynch is/was just another Goldman Sacks.
So I doubt Key really knows how to trade off his own back with his own money.
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