NZ funds could still be cheaper despite sharing top-of-the-class results for costs in Morningstar’s latest global industry report, according to Greg Bunkall, head of Asia-Pacific portfolio acquisition for the research house.
The Auckland-based Bunkall said there “should always be downward pressure on fees” with plenty of room for NZ managers to lower costs for investors.
“We don’t see any acceleration on lowering fund fees,” he said.
And while NZ jumped up to joint equal in the Morningstar report ‘fees and costs’ category this year, Bunkall said the hurdle wasn’t particularly high.
“This is a relative rating,” he said. “We’re comparing NZ with funds across Asia, for example, where fees are extremely high.”
However, the 2017 Morningstar Global Investor Experience Study says NZ’s rise to the top rankings in fund fees and expenses – the only one of the four categories where the country improved since the 2015 report – represents “a number of positive trends”.
“It is increasingly easy to buy funds with no loads or trailer commissions when purchasing funds without advice. Payment for advice is increasingly being done directly as opposed to through fund commissions, and the use of front loads on funds is decreasing,” the report says. “Costs for locally domiciled equity and allocation funds are below the global average. Domestic fixed-income funds are more expensive than peers.”
But Morningstar notes an increasing number of NZ fund managers are charging “asymmetrical” performance fees that are not clearly disclosed.
NZ remained static compared to the 2015 study across the other three categories ranked by Morningstar as important for managed fund consumers: regulation and taxation; disclosure; and, sales.
The researcher rated NZ as ‘below average’ for regulation and tax and ‘average’ for the remaining two metrics in spite of some improvements in all areas.
While noting that NZ has a “robust regulatory framework” and “relatively low” fund tax impost, Morningstar says “there are a number of areas that trail best practices, including limited restrictions on the use of soft dollars, the lack of supervisory boards for funds, and the regulation of fund advertising is not as comprehensive as other markets”.
Fund disclosure, too, has improved markedly under new Financial Market Conduct Act (FMC) rules, but not enough to lift NZ above average, the study says. Morningstar marked the NZ regime down for still overly-long disclosure documents and “language, [that] while simpler in nature is not consistently so”.
Likewise, in its ‘sales’ ranking the research house found evidence of improved quality of advice and a “full spectrum” of channels for fund-loving consumers.
However, Morningstar found the NZ fund market was top-heavy – with the top 10 managers responsible for 75 per cent of sales – and loophole-prone fiduciary standards.
“Interestingly, we see that the fund supermarket, or online brokerage, channel—which typically features an open-architecture platform with thousands of fund choices from multiple asset managers—is now widely available in all markets with the notable exception of New Zealand,” the study says.
Overall, Morningstar rated the NZ funds environment as ‘average’ under a new scoring system that dispenses with the previous 12-gauge letter-based rankings.
“… letter grades have different meanings and connotations around the world,” the report says.
Instead, fund regimes are labeled from ‘top’ to ‘bottom’ with three variations on ‘average’ in between.
Morningstar also amended some of its underlying scoring metrics, most notably dropping ‘media’ from the previous ‘sales and media’ heading.
“Morningstar continues to believe that the media can play a key role in educating investors and holding the fund industry to account… [but] there is a smaller weighting to this element,” the study says.
“Use of the World Press Freedom Index was removed in 2017 as it did not always correlate with the way the financial press operated in certain markets.”
Bunkall said the biennial Morningstar study reflects the fund experience from the consumer point of view and was not a qualitative judgment of manager skills.
However, he said the NZ industry needed to keep improving or it would “slip backwards” relative to the rest of the world.
The report covered 25 markets with none falling into the ‘bottom’ ranking. Only the US market was rated ‘top’ overall with a quintet of European nations filling the de-facto basement level of ‘below average’.