'D' is for depressing news

New Zealanders have been voting with their feet for decades against our funds management industry, and now a foreign analyst has delivered the coup de grace.

This week Morningstar gave New Zealand a D minus rating in its annual Global Fund Investor Experience research report, which measures how attractive a country is for fund investors. It said New Zealand was the worst in the world, "largely because of low grades for prospectuses and shareholders' reports and taxation".

The rating is deserved and should be a wake-up call for our funds management industry and those setting the rules for our capital markets.

The controversy and pain around the closure of the two big ING toxic bond funds emphasised just how unpopular fund managers have become. The enthusiasm early last year about KiwiSaver is waning every week as the reports come through in the mail detailing the losses.

Last year's market collapse will have burned off the last remaining supporters of managed funds.

There have been various false dawns. Some rushed into managed funds in the late 1990s when stock markets globally were booming. They were burned badly in 2002 and 2003 when markets plunged. Before that, investors jumped into funds during the early to mid-1990s, believing professionals would manage their money better than amateurs. Yet every time their confidence has been dashed.

Confidence in stock markets generally and managed funds in particular will struggle to recover without massive changes because we have been out of love with stocks for a quarter of a century.

Reserve Bank figures show New Zealanders had $18 billion invested directly in stocks at the end of 1986. That was down to $11 billion at the end of last year.

In the mid-1980s, New Zealand didn't have much of a managed fund industry. We had only $2 billion invested in them at the end of 1986.

Funds management was a product of the early to mid-1990s. Our investments in them rose to $18 billion by 1998. Yet their growth since then to $28 billion pales in comparison with other assets. The value of housing rose from $216 billion in 1998 to $568 billion by the end of last year.

New Zealand investors have essentially lost faith in managed funds. They are too expensive, too opaque, have often been mis-sold and have performed poorly, particularly when actively managed.

This is not just because the underlying stock markets have done badly. Independent analysis of fund managers over the longer term shows they mostly underperform the markets they invest in once fees are included.

New Zealand fund management fees are higher than in big markets, where economies of scale can be used to cut fees, particularly for those funds that are managed passively and simply track indices. The advent of KiwiSaver may help change this as our fund managers are given the scale to get costs down. But it is a gift from the Gods for the fund managers.

Let's hope they use it to improve their performance, reduce their costs and become more transparent. The Financial Markets Taskforce is presently looking at the issues of transparency and confidence. They have plenty of work to do.

In 10 years' time we need to be doing much better than a D minus, or we will have no capital markets to speak of.

* Bernard Hickey is the managing editor of www.interest.co.nz, providing information about interest rates, banks, finance companies and the economy.