Licensed NZ fund managers marketing alternative asset funds can breathe easier for another five years after a regulatory exemption providing benchmark relief was rolled over again – and extended for ‘single asset’ products such as cryptocurrency.
In a release last week, the Financial Markets Authority (FMA) confirmed the index exemption rule for certain non-standard licensed funds will apply for a further five years as of mid July 2024.
The benchmark ruling followed a short consultation launched in March ahead of the previous five-year relief expiration date this July: the FMA issued a temporary one-year exemption rollover while weighing up consultation feedback.
“After considering submissions, we have decided to continue the relief for a further five years. This will provide continued relief to MIS [managed investment scheme] managers with funds that invest, in whole or in part, in assets that do not have an appropriate market index and instead allows managers to take alternative approaches,” the regulator says.
“Relief will also be extended to allow exempt funds investing in ‘single assets’ to use alternative indices. The current notice will be revoked on the close of 16 July 2024, and we intend to finalise a new notice to give effect to this decision before the current exemption expires.”
Benchmarks have been a key focus of the FMA in recent years, including in a pilot ‘value-for-money’ study published last year that found some fund managers “are not using an appropriate market index for their funds and/or their performance fee models – typically, through using a cash-based market index as a reference point for the performance of an equity-based fund – and there is wider fund manager scepticism about the value of a market index to determining value for money.”
Under current regulations, licensed NZ fund managers must report performance against a “broad based securities index”, or justify other benchmark choices if they cannot rely on the exemption.
But the relief acknowledges that in cases where there “is no appropriate market index for a fund or a portion of its assets, a manager cannot in practice comply with these requirements”, according to the March consultation document.
However, the impending rollover exemption looks set to provide further clarity for funds that invest in ‘single assets’ such as bitcoin or gold.
“Investors in exempt funds that invest, in whole or in part, in single assets may benefit from managers being able to use an alternative index or indices in respect of those assets. Currently, where a fund invests solely in a single asset and relies on the full exemption for the market index requirement, investors receive no benchmark information at all,” the FMA consultation says.
“For example, a fund that invests solely in a cryptocurrency (whether directly or through an underlying fund) and has no appropriate market index or peer group index does not currently disclose any relevant benchmark at all. This is despite there being clear return and asset price information against which the performance of the fund could be compared (albeit not in the form of a currently accepted index). We consider that in this situation, the use of an alternative, relevant index would be preferable to no index at all.”
In a series of papers published earlier this year, Russell Investments called out NZ fund benchmarking practices for falling “short of global best practice”.
The Russell studies found most single asset class and diversified funds offered to NZ retail investors were poorly indexed including “sub-optimal” KiwiSaver scheme benchmarks