The NZ funds industry has been marked down a notch by research house, Morningstar, in its latest assessment of fees.
NZ has sunk to average in the fee rankings, according the research house report released last week, as it fell behind offshore peers over the last couple of years.
Greg Bunkall, Auckland-based Morningstar data director, said in a release that “in a global environment of shrinking fees, the [NZ] industry risks falling behind global peers, given the improvements in fees and expenses that other markets are making”
Bunkall said NZ has not kept pace with the shift to low-cost passive investments (including exchange-traded funds – or ETFs) that have seen fees fall dramatically in other countries.
“New Zealand also lags global best practice for its lack of transaction fee reporting for managed funds,” he said.
Morningstar also pulls up the NZ market for lax rules around performance fees.
“There is no prescription by regulation for the performance fee benchmark to be appropriate and tied to the asset allocation of the fund,” the report says. “This has led to some inappropriate benchmarks being used as hurdle rates in the New Zealand market. Large performance fee earnings, which reflect market movements rather than manager skill, have been evidenced in recent years.”
Asset-weighted NZ median fund fees for local-domiciled products ranged from 0.59 per cent for fixed income to 1.09 per cent for diversified to 1.3 per cent for shares: fees across the total ‘available’ market (which includes offshore-based products) were similar, bar slightly lower average costs for equity funds of 1.21 per cent.
Trans-Tasman cousin Australia, however, retained its equal-top ranking for fee-fairness in the latest Morningstar review of the global funds industry.
Along with the US and the Netherlands, Australia earned the Morningstar seal of approval “based on practices such as investors paying for advice outside of commissions, banned front loads, and low asset-weighted median expenses”.
The report – now in its seventh edition – says the US and Australian markets, in particular, feature low fund fees due to “the effect of economies of scale and competition”.
Asset-weighted fund fees in the Australian market averaged 0.54 per cent for fixed income, 0.87 per cent for diversified and 1.05 per cent for equity products; in the US, Morningstar reported the respective figures as 0.58 per cent, 0.63 per cent and 0.43 per cent.
“Also notable is that the US and Australian markets are closed to funds domiciled elsewhere, so their low domestic expenses are not affected by more-expensive offshore funds when calculating the available-for-sale expenses,” Morningstar says.
The research house notes, too, that the best-in-show jurisdictions feature its favoured ‘unbundled’ approach to ongoing fund fees that strip out all costs (for example, commissions) bar investment management expenses.
“… investors benefit from greater choices and improved transparency. In addition to lowering all-in costs for do-it-yourself investors, those participating in a fee-based advice model may accrue additional benefits from more individualised service, including savings guidance, tax planning, and pension optimisation, which collectively add significant value to the investor experience,” the report says.
“Additionally, when paying directly for advice, an investor can avoid the inherent conflict of interest that occurs when advisers are compensated for promoting specific products. In the worst possible outcomes from ‘bundling,’ investors run not only the risk of receiving poor quality advice, but of receiving no advice at all.”
While Australia scored low on uptake of ETFs, Morningstar says the listed product vehicles were quickly gaining popularity among investors – especially in the self-directed retail market.
“… advisers are increasingly recommending them, although managed (mutual) fund recommendations still dominate,” the study says.
As at July 2021, the Morningstar Australian fund universe totaled A$1.2 trillion including A$112 billion in ETFs.
“We believe that vibrant ETF markets put fee pressure on open-end products,” the report says. “As inherently ‘clean’ share classes that exclude initial charges and ongoing commissions, ETFs are particularly well-suited for use in unbundled advice programs, which we maintain are an industry best practice.”
But bank-based bundlers, especially, score lowly in the Morningstar analysis that ranks Italy and Taiwan at the bottom of the pile.
“In markets where banks dominate fund distribution, there is no sign that market forces alone will drive down asset-weighted median expense ratios for retail investors,” the study says. “This is particularly evident in markets like Italy, Taiwan, Hong Kong, and Singapore where expensive offshore fund sales predominate over those of cheaper locally domiciled funds.”
The fund fees analysis is the first installment of the biennial Global Investor Experience report, which Morningstar unbundled a few years ago into three parts: part two, disclosure, is due in the second half of this year with ‘regulation and taxation’ to follow.
Report authors include Australian ex-pat, Grant Kennaway, who now serves as Morningstar head of manager selection based in Chicago.