In the fourth and final part of a series on investment performance, I look at regulation and information.
In New Zealand we still have a long way to go to lift the quality of our investment and savings decisions, and crucial to that is getting fund managers to report reliable data to the public on a regular basis.
If KiwiSaver really is going to be our savings solution, the Government needs to ensure savers receive information that is relevant, complete, comparable and, above all, has integrity. The Minister of Commerce recently released proposals for KiwiSaver reporting available here. Let’s examine some of his recommendations.
Returns and fees
The minister is keen for savers to compare investment performance (Clause 30) but not keen enough, it seems, to recommend that KiwiSaver providers be required to adopt the Global Investment Performance Standards (GIPS) for reporting returns.
When it comes to investment returns and fees, a great deal of regulation and compliance could be avoided by adopting GIPS, and it would also take the industry closer to world best practice.
Better still, insist on GIPS returns being reported after all fees, costs and taxes so that savers can see genuine in-the-hand returns. Ideally, providers should be required to report risk-adjusted returns – returns are but one measure of investment performance; risk (volatility, liquidity and catastrophic) is every bit as important.
Furthermore, the relevant comparison for any fund is to the appropriate benchmark. Only if another fund has the same benchmark can you validly compare funds, otherwise it’s like comparing apples with oranges – the funds are not trying to achieve the same thing. The simplistic approach suggested in the minister’s paper falls short of what savers deserve.
There is a myopic obsession on fees and costs in the minister’s paper. While it is laudable to aim for total see-through to all layers of fees, there are crippling limitations. It’s easy enough to force providers to disclose the costs incurred in using a fund manager or purchasing an interest in a listed investment trust or exchange traded fund, but nowhere near as straightforward to get the management fees an investor pays when investing in a conglomerate or a business that contracts management to another party (for example, Infratil).
Such fees and expenses are just as real to the returns investors receive as the traditional fund management costs the minister is so keen for providers to report – a case of limited disclosure.
Level of disclosure
The minister recommends providers be required to detail just the top ten holdings in a fund. But that’s not enough for investors to properly compare concentration and liquidity risks between funds. The argument given in the paper for not requiring fuller disclosure (clause 45) is that a full list can be “costly to prepare” or may be publicly available anyway. Come again – this is simply not logical. To add insult to injury, the Financial Markets Authority (FMA) is to be given the power to exempt providers from doing even this. Investors can be forgiven for questioning just whose interests is the Government giving priority to.
While the minister is calling for liquidity and borrowing to be disclosed, the liquidity ratio is not defined. It suggests there is some binary measure – an asset is either liquid or it’s not. This would be a gross oversimplification and potentially mislead investors wanting to determine how liquid the fund was.
As I outlined in my last article, an asset’s liquidity is a function of the size of the manager’s holding of an underlying asset compared to the average daily volume of trades of that asset. It’s also important providers be required to disclose the extent to which returns depend on estimating the value of individual assets.
Such returns can never be as reliable as those where all assets in the fund are priced daily by a deep and active market.
Perhaps the most telling shortcoming of the paper is who was consulted. Clauses 60 and 61 tell us that the Ministry of Economic Development consulted with the funds management industry, the FMA, Treasury and Inland Revenue. There is no reference at all to consultation with the investing public. This is inexcusable and continues a long tradition in regulating New Zealand’s financial sector.
Policy advisers’ views too often reflect those of the industry and not the investor, and yet it is the investor who’s in need of protection. It is a travesty that bureaucrats have failed to consult with investors or their advocates in framing rules for greater and more comparable reporting of returns and fees for KiwiSaver.
The industry seems to have convinced officials and the Government that the cost of complying with best-practice reporting of returns outweighs the right of investors to receive high-quality information to enable them to make sound investment decisions.
The minister’s recommendations on periodic reporting for KiwiSaver funds fall short of best practice – adopting the Global Investment Performance Standards would address a number of the shortcomings I’ve covered above.
It’s great that we are raising the bar, but let’s set it with investor interests definitely taking priority and take the opportunity to set the bar high. We’ve got a lot of ground to make up in terms of the way we inform and educate our investors.
As I said in my first article, it’s not a matter of how much we save but how well we manage our savings. Giving investors the right information is fundamental to lifting their understanding and thus helping them to make better investment decisions.