The NZ fund industry lags the world in disclosing transaction costs, research house Morningstar says in part three of its ‘Global Investor Experience’ report.
Under a plain-pack labeling system that eschews the traditional letter- or star-based gauges, Morningstar rates the NZ managed fund market as ‘average’ overall for disclosure across a scale that spans ‘top’ to ‘bottom’.
Based on an assessment of six sub-categories – including fee, portfolio holdings and sales – NZ remained stuck in the Morningstar middle-ground primarily due to sub-par performance in revealing transaction costs, sketchy portfolio holdings data as well as lack of standards for environmental, social and governance (ESG) and ‘stewardship’ disclosures.
Greg Bunkall, the Auckland-based Morningstar Asia-Pacific data director, said not including mandatory transaction cost disclosures marked NZ as a “real outlier”.
Bunkall said most jurisdictions – even Australia, which ranked worst in the latest Morningstar study – require funds to report transaction expenses separately of management and administration fees.
“Transaction cost disclosure can add a lot of value,” he said. “Showing the cost of implementation indicates how well managers are controlling trading expenses, for example, which can have an important impact on returns.”
While most consumers probably won’t pay attention to such detailed disclosures, Bunkall said transaction cost transparency remained critical for assessing fund manager performance.
“Disclosure [of transaction costs] can give consumers confidence that someone else is doing due diligence on their behalf,” he said.
Elsewhere, Morningstar marked the NZ industry down for limited disclosure of portfolio holdings (which can be vague and don’t include actual weights) and the fact “neither managers’ investment in the fund nor their compensation is provided to investors”.
Morningstar also slammed NZ for having no ESG reporting standards for fund managers.
In a quirk of timing, the Morningstar ESG critique arrived on almost the same day the Financial Markets Authority (FMA) released guidance on the issue.
The FMA ‘Disclosure framework for integrated financial products’ guidance note is the regulator’s attempt to quash so-called ‘greenwashing’ in an industry where almost everything now comes flavoured with ESG.
As well as highlighting how ‘fair dealing’ provisions apply to the ‘integrated’ market, the guidance lays out the “type of disclosure the FMA expects from issuers of such products” and enforcement options for breaches.
Sarah Vrede, FMA capital markets director, said in a release: “Demand for integrated financial products is continuing to grow, and we want investors to have confidence that these products will deliver what they claim.
“Misleading marketing, poor product design and other types of ‘green-washing’ all have the potential to undermine investor confidence in integrated financial products.”
The Morningstar study says as at September this year, there were “no public plans by the regulator or any industry body” to set ESG reporting standards for NZ fund managers across metrics including “exclusions, integration, or engagement”.
“There is also no reporting of voting records for [NZ] funds like we see in other markets,” Morningstar says. “This does and has led to consistent calls and accusations of greenwashing.”
Whether the FMA guidance lifts NZ above average in Morningstar’s eyes will have to wait until the next report but the 2020 edition notes a huge surge in ESG disclosure rules of late across the world.
“Over 170 ESG-related regulatory measures were proposed globally in 2018 —more than in the prior six years combined,” the study says. “And tellingly, more than 80% of the measures target institutional investors rather than companies or issuers.”
The global research house, which took full ownership of ESG data firm Sustainalytics in July this year, is also doing more to wring out the greenwashing, the report says.
“… Morningstar has begun independently evaluating the asset managers and funds it rates qualitatively in its development of the ESG Commitment Level, a measure that considers ESG philosophy and process, firm- or strategy-level resources dedicated to ESG, and active ownership to help investors understand how ESG informs investment strategies,” the study says.
Bunkall said the ESG Commitment dial would range from 1 to 4 with the higher score indicating managers had “truly embedded” sustainable investment in their processes.
Australia ranks bottom (officially, ‘bottom’) in the Morningstar disclosure report, mostly as funds across the Tasman do not have to report full portfolio holdings, while India and the US hold the top (‘top’) spots.
Morningstar dissected its biennial Global Investor Experience report, previously published as a single volume, into four components for the latest round, beginning with the ‘fees and expenses’ module last September.
NZ rated ‘above average’ in the fees report followed by a ‘below average’ in the subsequent ‘regulation and taxation’ study published this April. With the disclosure rankings now disclosed, the NZ funds industry remains average, on average, in the eyes of Morningstar.
The final chapter of the Global Investor Experience covers ‘sales’ including adviser commissions and fund distribution arrangements, providing NZ one final chance to rise above the mean.