Fund managers need to improve disclosure

Wednesday 20th May 2009

New Zealand fund managers, awarded the lowest possible rating in a global survey by Morningstar, need to increase disclosure of portfolio holdings, the investment researcher said.

New Zealand rated a D-, the worst out of 16 developed nations across North America, Europe and Asia for investor-friendly practices. Portfolio holdings disclosure is in dire need of improvement, according to the report, with New Zealand and Australia the only countries surveyed that don’t require it.

The Securities Commission was deemed to be lacking resources and was ineffective in “achieving industry consensus across a range of issues,” the report said.

“Where regulation is lacking, the mutual fund industry does not make up for it with voluntary disclosure,” the report said. With no standard representation of fees and expenses, “it would be beneficial to investors if fund companies would provide a numerical example illustrating the impact of fees on assets.”

Morningstar was disappointed funds’ prospectuses didn’t contain enough information around the cost of trading securities and found the average investor paid a total expense ratio of more than 1% in fixed income and equity funds.

In the US, the total expense ratio was less than 0.75% for fixed income and less than 1% for equity funds. The US gained the highest rating and was the only nation to gain an A. Australia managed on a C rating. The other countries included were China, Taiwan, Japan, the Netherlands, Italy, Canada, France, Switzerland, the UK, Singapore, Germany, Hong Kong and Spain.

New Zealand’s tax system was criticised by Morningstar for its high dividend tax rates and lack of incentives for long-term investing. A typical investor’s tax rate outstripped the progressive Pay As You Earn income tax system, it said.

Asset custody was another area of concern where custodians were not necessarily independent of the fund manager. The researchers also encouraged the local media to pay more attention to the merit of long-term investing and the negative impact of high fund costs.

Businesswire.co.nz

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