NZ retail managed fund fees have been labeled slightly less attractive compared to two years ago but remain above average relative to global peers, a new Morningstar study shows.
The latest biennial Morningstar ‘Global Investor Experience’ report found NZ retail funds (excluding KiwiSaver) were generally competitive on costs.
However, the prevalence of ‘front-loaded’ distribution fees, “asymmetrical” performance charges and low use of exchange-traded funds (ETFs) kept the NZ funds industry out of the Morningstar top-tier jurisdictions – Australia, Netherlands and the US.
According to the study, equity funds carry an average fee of 1.32 per cent for NZ retail investors (ninth out of 26 countries in the Morningstar survey) while diversified ‘allocation’ products averaged 1.18 per cent and fixed income 0.64 per cent.
The report notes NZ investors have access to both locally-domiciled and offshore-based funds that has “created product in certain asset classes to bring market-leading investment options to New Zealand via overseas firms, although the selection is not great in all asset classes”.
“The expense ratios of funds domiciled in New Zealand are typically competitive with foreign fund sponsors, exchange-traded funds being the notable exception,” Morningstar says. “Although New Zealand-based ETF proponents would argue the importance of access, tax imposts and trading costs can even the playing field somewhat against the higher expense ratios for certain investor types.”
Historically, NZ retail investors have preferred offshore-domiciled ETFs but the study says local-listed products (the NZX-owned Smartshares range) are starting to make in-roads “particularly as the fees have come down recently”.
“It is rare for investors to pay for advice for investments in ETFs, and there has not yet been a proliferation of robo-advisers, which would use ETFs as building blocks in investment portfolios,” the Morningstar report says.
Morningstar also pulled up the NZ retail fund market for the use of performance fees that, while disclosed, could disadvantage everyday investors.
“The [performance fee] benchmark does not have to bear any relevance to the fund assets or objectives and is often cash-based, which leads to poor investor outcomes and large performance fees for asset management firms,” the report says.
“… We view performance-based fees favourably only when structured to appropriately align management’s interest with fund shareholders’. Best practice for performance fees includes the use of an appropriate benchmark and emphasising long-term periods in measuring performance.”
Globally, the study says bans on commissions, mandatory fee disclosure and “decoupling of fund expenses from advice charges” have “seen many investors pay less for funds than ever before”.
Morningstar says “unbundling” advice and investment expenses has lowered costs for self-directed investors while opening up opportunities for fee-based advisers focused on “guidance, tax planning, and pension optimisation, which collectively add significant value to the investor experience”.
The US-headquartered research house has itself unbundled the Global Investor Experience report, chopping up the four traditional sections into separate publications with the remaining three – regulation/tax, disclosure and sales – to be released next year.
Tim Murphy, Morningstar director of manager research Asia-Pacific, was the Australasian contributor to the latest study.