FMA reports on active and passive fund management
Today, the Financial Markets Authority (FMA) released an independent report into investment management styles of KiwiSaver providers.
The FMA commissioned MyFiduciary to examine how active or passive each KiwiSaver provider is, and whether investment management fees differ between active and passive approaches.
Who needs to read it? Why?
The report will be important to all KiwiSaver providers. KiwiSaver providers and fund managers should note the issues raised by the report, and expect increased FMA monitoring and supervision activity in relation to KiwiSaver fees.
What does it cover?
- Activeness Delivered versus Promised – Most KiwiSaver schemes classified as ‘mainly passive’ and ‘mixed’ are reasonably true to label. However, some providers who describe themselves as ‘mainly active’ are not materially more active than passive providers.
- Activeness Promised/Delivered versus Fees Charged – There is no evidence of any relationship between professed or actual style (of active or passive management), and the fees that are charged. This contrasts with the expectation that the less active providers would have lower fees, on average, than the most active providers.
- Analysis of KiwiSaver Fees – Investment management fees have declined globally and the price of investing in New Zealand has decreased. However, the decreased input costs have not resulted in obvious declines in the fees charged by KiwiSaver providers overall. The report suggests value for money in some KiwiSaver products is not as high as it should be. Default provider schemes should also be subject to more scrutiny.
The report is part of the FMA’s broader focus on value for money in KiwiSaver. Some of the findings indicate that more can be done to ensure appropriate fees are charged to reflect the underlying costs and value delivered to investors.
It underscores the FMA’s active interest in whether the product does “what the label on the tin says”. Last year, in the context of commenting on what amounts to good customer outcomes, FMA chief executive Rob Everett said it's ensuring “that the customer clearly understands what they’re getting into and the product performs as expected and promised”.
But more than that, the report links the nature of the product with whether the level of management fees charged are appropriate for that type of product. That is a more subjective judgment in which there can legitimately be a range of views as to what is appropriate, assuming clear disclosure.
In our view, the report is a warning to managed funds issuers to ensure that what is said in the broader suite of fund documents (including the SIPO as well as the PDS and OMI) clearly reflects the way the product is managed and performs, and that the level of charges are defensible. Checking those features should be a part of the regular due diligence process. While the conduct and culture reviews of 2018/2019 where focussed primarily on banks and life insurers, it is clear the FMA’s interest includes the broader range of product issuers regulated by the FMA.
The FMA has indicated that it will engage with managers of those schemes with high fees and relatively low levels of active management. FMA will also producing guidance on its expectations about KiwiSaver fees. The guidance will also cover how active or passive management styles should be disclosed to investors.
If you have any questions in relation to issues highlighted in the report, or about regulatory requirements relating to funds management generally, please contact one of our experts.