Andrew Gawith: Comparing funds is easier said than done

A lack of data makes it hard to compare the returns of KiwiSaver fund managers. Photo / Bay of Plenty Times

Opinion

Savers like to know how their investment manager is performing, and when times are tough investors can get pretty excited about relative returns.

The trouble is that comparing the performance of investment managers is easier said than done and not just because some managers go out of their way to make it difficult, but also because investment returns reflect a whole host of factors that can make comparisons nonsensical.

The Government has responded to the Huljich Wealth Management controversy by promising to fast-track changes to KiwiSaver reporting requirements.

It's unclear at this stage precisely what is intended, but it has said that "KiwiSaver funds should be required to regularly report to investors and the regulator on the returns, fees and assets of each fund in a consistent and comparable manner".

That sounds great - at last some hope that savers will find it simple to compare returns. But before we start celebrating, let's look at some industry reporting standards and why they don't tell the full story.

Firstly, people think that their reported performance is based on what their account is currently worth should they be in a position to close it.

That would mean reporting returns after all costs have been deducted from the account. That includes deducting all fees and expenses as well as all tax from the account.

Now that seems logical and should be reasonably easy to do. But that's not how returns are reported.

The current convention in New Zealand is to report returns after fees and expenses have been deducted but before tax is paid. So the reported returns are a little better than the saver would in fact receive.

Let's have a look at how the tax bill can affect investments and skew reported returns.

Portfolio A reports a pre-tax return of 12 per cent and Portfolio B reports a pre-tax return of 10 per cent.

Let's say the fund managers have invested in assets with different tax status, so Portfolio A's return is totally taxable and Portfolio B's isn't.

The after-tax return would actually be 8.4 per cent for Portfolio A and 10 per cent for Portfolio B.

Confusing the picture as to what the saver actually receives in their hand doesn't end there. Despite the published performance data saying it is after fees but before tax, read the fine print and you may find not all fees have been deducted.

It's a given that the management fee will have been deducted but there are a host of other expenses that may or may not have been deducted. These include items such as custody, trustee, legal and marketing costs and so on.

The published performance tables don't disclose what fees and expenses are or are not included in the return calculation.

So, published returns generally tend to exaggerate the actual performance of an individual saver's account.

If the Government is looking for a standard for reporting performance that's meaningful for savers, it should be after all fees, expenses and taxes have been deducted.

Secondly, savers need to get smarter when comparing returns. The finance company debacle highlighted the fact that many savers chased returns with little or no regard for risk.

High returns are often (but not always) synonymous with high risk.

That's true across most areas of investment, although as I pointed out several weeks ago, a low-risk bond portfolio would have convincingly outperformed a riskier or more volatile share portfolio over the past decade.

But let's stick to comparing, say, growth funds - funds with a similar risk profile.

Even here there can be marked differences between funds in terms of how concentrated they are, what markets they invest in, the themes they pursue, etc.

The manager's investment approach will have a bearing on returns and risk, and should be taken into account when comparing returns between one manager and another.

But the almost complete lack of readily accessible and meaningful data in this regard makes any comparison a Herculean task.

It would certainly be good to get investment managers and KiwiSaver providers to report their investment returns on an after-all-fees-and-tax basis.

That should be the Government's starting position. Secondly a clear, accurate and accessible description of the manager's investment approach should be available.

And all this information needs to be delivered by a reputable and totally independent government institution.

* Andrew Gawith is a director of Gareth Morgan Investments www.garethmorgan.com