Investors - where are your pants?

Wellsford's Rene Ranger is caught with his pants down during their club rugby battle with Mid Western. Photo/Northern Advocate.

Someone told me last week that New Zealand's fund managers are all too eager to "drop their pants" to secure a mandate with the New Zealand Superannuation Fund (NZS). That is, managers will accept substantially lower fees for the privilege of running the huge lumps of money that NZS doles out to the lucky winners - even to the extent of making the whole exercise barely profitable for the firms in question.

And that's exactly what both ING and the NZX-owned index fund manager Smartshares told me  was the case after they were fired last week by NZS.

The mandate losses - $200m in the case of ING and double that for Smartshares - would hardly dent their respective bottom lines, I was informed. There is, of course, a pinch of PR posturing in these statements - no-one likes to lose business - but even discounting the usual corporate spin, I got the sense that both ING and Smartshares weren't overly concerned at being turfed out of the NZS fold.

The Smartshares story is particularly revealing for what it says about the difference between wholesale and retail pricing in funds management.

"[The NZ Super mandate] was a significant part of Smartshares' funds under management but it was a much less significant part of its revenue," NZX markets development manager, Geoff Brown told me.

From what I could ascertain, Smartshares was charging NZS less than 10 basis points (or .01 per cent) to manage $400m matched to an index of New Zealand equities. For the same service, retail Smartshare investors must part with over 70 basis points, which is high by international standards for a simple listed equities index fund (Australians, for example, pay about 35 basis points for a comparable product).

That is an extraordinary spread - or I hope it is.

In this relationship it's easy to see who's wearing the pants.

 

David Chaplin

Pictured: Wellsfords' Rene Ranger caught with his pants down during a club rugby match against Mid Western. Photo/Northern Advocate.