Fee disclosure under Financial Markets Conduct Act (FMC) rules will likely be a work in progress for at least a couple of years, according to George Carter, head of Nikko Asset Management NZ.
Carter said fee disclosure, particularly for complex multi-manager funds or those with performance fees, would probably evolve over the next few years as the industry settled on FMC-compliant best practice approaches.
He said while the FMC regulations currently allow managers some latitude in how they disclose underlying fund fees, Nikko has adopted a show-all policy.
For example, Carter said investors in Nikko’s most complex product – the JP Morgan Asset Management (JPMAM) Multi-Strategy Fund – would see a big jump in fee levels in new disclosure documents.
Previously, Nikko published only the 1 per cent management and potential performance fees charged by JPMAM rather than those levied by the up to 40 underlying hedge fund managers (which may also include performance fees). However, Carter said in new disclosure documents investors would see both the top-level fund fees and the total underlying manager charges that JPMAM deducts before reporting performance.
While the net effect for investors would be the same, he said the new reporting method would comply with both the letter and “spirit” of the FMC.
Carter said Nikko could possibly have swept the underlying manager fees into the too-hard basket but decided the up-front approach was worth the effort.
“It is a big change in the way we disclose but it makes everything much more transparent for investors,” he said.
Nonetheless, Carter said reporting prospective fees on a fund that includes an ever-changing roster of up to 40 underlying managers – many of which might also levy performance fees – came with some challenges.
He said Nikko “due to the varied and changing nature of underlying managers, Nikko can’t even describe in words the underlying funds’ fees in the Multi-Strategy product in advance, let alone provide a forward-looking fee schedule.”
“But we can say what the underlying funds’ fees have been over the last quarter,” Carter said, “which should give investors some guidance about what to expect.”
He said other managers might take a different approach to disclosing underlying fund fees depending on their legal advice.
NZAM – probably the only hedge fund-of-funds to have published documents on the Ministry of Business, Innovation and Employment ‘Disclose’ website – lists its ongoing annual fee (1.45 per cent) with a further estimated total annual fund charge including underlying manager fees that add about 1.8 per cent in costs.
The industry would probably develop more standardised disclosures for such complicated multi-manager products over the next few years as the FMC bedded-down, Carter said.
Nikko was also considering other changes to its fund structures as a result of the FMC, according to the manager’s latest prospectus.
The November 2015 Nikko prospectus says the group might amalgamate its wholesale and retail unit trusts.
However, Carter said the retail-wholesale merger has been binned for the time-being.
“We decided that it was too difficult to both amalgamate and opt-in to the new regime simultaneously,” he said. “It is something, though, which is worth revisiting in the not-too-distant future. Once things are bedded in and we can make an informed decision about what is best for both our institutional and retail investors taking into account aspects such as costs, disclosure, operational efficiency, etc.”
Nikko, which recently surpassed $5 billion under management, was one of the first NZ entities to earn a managed investment scheme (MIS) licence.