Inside Money : Goodbye Cash Pie

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According to the increasingly anonymous research house FundSource (the 'Who is FundSource' page offers no clues), for the first time in two years flows into retail managed funds surpassed KiwiSaver inflows during the last three months of 2010.

Does this herald a recovery in the non-KiwiSaver retail investment business?

Nah.

FundSource admits that the growth in non-KiwiSaver unit trust business was "mainly attributable to KiwiBank's latest Cash Pie fund".

Indeed, FundSource says of the $902 million of net flows into the retail fund sector (including KiwiSaver and other funds) during the December 2010 quarter $583 million went to cash - not all to KiwiBank's Cash Pie but probably a fair proportion.

Cash Pies should really have been excluded from the flow data because they're only nominally managed funds; they are simply saving bank accounts in disguise.

Designed to take advantage of the PIE (portfolio investment entity, of course) rules that were introduced in 2007, the Cash Pie loophole has been cleverly exploited by KiwiBank, Rabobank and others to allow those on high marginal rates to enjoy a tax break on their bank interest earnings.

But if the government, as it says it would, takes the recommendations of the Savings Working Group (SWG) seriously, Cash Pies would become redundant products.

Under the SWG proposals (which, interestingly, directly counter an earlier recommendation of another quango, the Tax Working Group) , bank interest earnings would attract the same, lower, tax rate as other investments such as managed funds.

Hence no need for any tricky intervening structure to turn bank accounts into managed funds and a return to more anaemic retail flow figures from FundSource, whoever they are.