By Kevin Mitchelson
I had intended to move onto the next topic in the list below, external versus internal, but I realised that we needed to get some boring stuff out of the way first.
- Absolute return or benchmarking
- Active versus passive
- External versus internal
- Single sector or multi sector
- Timing versus selection
- Top down or bottom up
So let us repair to the bar for an intermission and discuss the various parties involved in bringing KiwiSaver schemes to life (apologies to Dr Frankenstein) before we return to the question that will hopefully be answered by the next installment, "Who actually manages my KiwiSaver money ?" and the implications it has for performance and cost.
Here are the various names that appear in KiwiSaver investment statements for parties that are involved in KiwiSaver schemes, in no particular order.
Manager, fund manager, investment manager, administration manager, promoter, trustee, issuer, distributor, investment adviser.
This is an example from the ANZ's KiwiSaver Scheme.
"Guardian Trust Superannuation Trustees Limited is the Trustee and Issuer of the ANZ KiwiSaver Scheme. OnePath (NZ) Limited is the Promoter and Administration and Investment Manager of the ANZ KiwiSaver Scheme. ANZ National Bank Limited is the Distributor of the ANZ KiwiSaver Scheme."
Let's take the easy ones first.
By law every KiwiSaver scheme has to have a trustee whose role is to look after the interests of the investors and are the legal (but not beneficial;that's you) owners of the assets of the scheme (your savings). They are also the issuer. Typically you are paying 0.05% to 0.10% per annum in trustee fees which, in my humble opinion, is just pure waste. The trustee is a legal hangover from olden times when they actually did take an active role. One only has to look at the role trustees played in the finance company collapses to understand how outdated the concept is.
Again under the law every scheme has to have a promoter(s). These are the people who are instrumental in forming the plan for the scheme and are responsible for making sure that what is in the investment statement and prospectus is correct and fulfills the required legal standards.
Distributors are different. Not all schemes have them and where they do, they are merely parties who "sell" the scheme to punters. They of course would have to comply with the various regulations around giving financial advice and distributing financial services products. Neither promoters nor distributors get fees directly from KiwiSaver contributors; however distributors who act as investment advisers may get commissions from the promoters.
Now for the ones that really matter : Manager, fund manager, investment manager, administration manager
Although they may be called different names, there are three separate roles here:
1. The entity that looks after the admin of the scheme, normally called the administration manager but can be called the manager. Administration fees, where they are charged explicitly, vary widely. Most schemes just charge a fixed dollar admin fee which ranges from $12 per year for the Kiwibank KiwiSaver Scheme and $63 for the Law Retirement Kiwisaver Scheme. They average around $34 per year.
The reason they charge a fixed fee is that they realised, with most KiwiSaver balances being so small to begin with, a percentage based fee would yield peanuts. Mind you, I won't be offering odds against a move to a percentage based fee once balances get a bit larger (yes, I know I'm cynical). In addition some schemes charge a percentage based administrative fee which ranges from 0.15% for the Mercer Super Trust Kiwisaver Scheme and 0.525% for the AMP Kiwisaver Scheme (apart from the Default Fund which only charges 0.35%).
2. The entity that decides on which assets the fund is going to invest in and who is going to do the actual investment, is normally called the investment manager but again can be called the manager. Perhaps a better name would be "manager of the fund managers". Almost all KiwiSaver schemes contract out the actual day to day management of the investments to another party, called the fund manager.
Even very large institutions like AMP use other managers, for example for their AMP KiwiSaver OnePath Balanced Fund, AMP KiwiSaver Tower Balanced Fund and AMP KiwiSaver Tyndall Balanced Fund. And to be really picky, AMP actually uses a separate company, AMP Capital Investors, to actually do the fund management. That last point is not as anal as it seems because in the end someone has to pay for the actual people and systems to do the day-to-day management and believe me AMP Services (NZ) Limited (which is the administration manager, investment manager and principal promoter) will be paying AMP Capital internally. Investment management fees range from 0.20% of assets to 1.50% and mainly depend on the type of assets being managed. For example, simple cash fund management fees range from 0.20% to 0.40%, whilst aggressive funds (which invest in a lot of equities) range from 0.34% to 1.50%.
3. And finally the entity that actually manages the assets, normally called the fund manager. To make matters confusing, sometimes the investment manager (see above) can also be the fund manager. The fund manager actually makes the decisions on what to invest in and when, within the guidelines set down by the investment manager. I will look more fully at the relationship between the investment manager and fund manager in the next installment. But here is a little teaser. Obviously fund managers do not work for nothing, but the vast majority of KiwiSaver investment statements are silent on what they are being paid or if their fees are included in the investment management fee. Here is one from AMP which isn't:
The investment management fees payable to the managers of the underlying funds in which Scheme assets (excluding Cash Fund and AMP Default Fund assets placed in bank deposits) are invested are met from the annual management fees outlined above.
Bear in mind that whatever the fund managers are being paid comes out of performance.
Coming soon: fund managers and how they fit into KiwiSaver schemes.