By Amanda Morrall
Fees on managed funds matter, that is much is widely agreed, but what is far from certain is how much you pay.
The contentious issue once again reared its head after the Financial Markets Authority (FMA), in its annual report on KiwiSaver, stated that KiwiSavers in default funds had lost close to half of their return on investment to fees. (Otago Daily Times carries the details). Given that just under a quarter of the more than 1.7 million KiwiSavers remain in default funds, the claim understandably caused a stir.
While fees vary sharply among providers and the 200 odd funds on the market, the relative costs for defaults funds are reportedly among the lowest.
Chris Douglas, co-head of research for Morningstar, said that while investors need to be pay close attention to fees , they shouldn't assume that if they are in a default fund that they're getting gauged. He said inconsistencies in reporting methods and data collection on fees, even by the FMA, cast some doubt on the accuracy of reports on fees.
"Fee data in New Zealand has got to be one of the more frustrating elements of KiwiSaver. There is still no regulatory framework in place for a fund manager to have to disclose what the total costs of their fund is. What happens then is you get a lot of data come out, different methodologies and frameworks, different assumptions and you end up getting some numbers that show some hideously expensive options while others appear quite cheap.''
Douglas said the truth was likely "somewhere in the middle. At the same time its incredibly frustrating for investors and we definitely need to see some more transparency out there."
The annual membership fees on KiwiSaver just scratches the surface. There are management fees, administrative fees, legal and trustee fees, expense and costs that are not explicitly disclosed.
Whereas most other countries are required by regulators to disclose a total percentage based cost on managed funds, KiwiSaver providers are under no such obligation.
"So investors, when they are buying into a fund, they can see what the cost has been under the last financial year.''
While the Financial Markets Authority is reviewing disclosure and reporting requirements, changes aren't expected until late 2012 or 2013.
In the meanwhile, Douglas said investors should do some research and ask questions of providers themselves. (See also David Chaplin piece in the New Zealand Herald on fees).
"I know it's incredibly frustrating for investors and we definitely need to see some more transparency out there...The Government has got to step up and we need regulatory requirements around fees for KiwiSavers.''
interest.co.nz calculates what we have called an "Expense Ratio" (see here for how we do it) and at this ranges from around 0.7% to over 2% of your investment per year.
While above average performance might justify the higher fees in some instances, Douglas said research points to low-fee funds being the long-term winners for investors when it comes to returns. (See interest.co.nz after-fee performance rankings here).
Douglas said investors need to be "very cynical" about fund managers who suggest you get what you pay for in KiwiSaver, promising outperformance in return for higher than average fees.
"What we have found is that by and large, is that low-fee funds out-perform high fee funds.''
"One of the factors is that if you have a high fee, you just have a much greater head wind of trying to beat the market and your peers. It's very difficult to consistently to do that.'' (See the effect of fees on your investment here)
Douglas said Morningstar's research also suggests that low-fee fund managers are generally "better stewards of investors' money.''
"They tend to be more mindful of costs, mindful of turnover and they tend to be more focused on the long-term, so the outcome is better for investors.''
So what should a KiwiSaver look for when it comes to measuring and monitoring fees?
Douglas said transparency was key but KiwiSavers needed to be vigilant about doing their homework. (Look up your fund here and compare it to other like funds).
Morningstar's KiwiSaver performance result to Sept.30, can be seen here.
See also interest.co.nz's comprehensive KiwiSaver section here.