Money: The British are coming

By PHILIP MACALISTER

If you thought choosing the right managed fund was already difficult because there are so many on offer, things are about to get a whole lot more complicated.

Your choice at the moment includes unit trusts, superannuation schemes, group investment funds, insurance bonds, Australian unit trusts and United Kingdom-listed investment trust companies. Each is a separate legal structure with its own idiosyncrasies.

Now, two new forms of UK-based managed funds are about to hit the market. One is the UK Authorised Unit Trusts, the other is the Open-Ended Investment Companies (known as OEICs).

Several fund managers, including AMP, Challenger International, Public Trust, Royal & SunAlliance and internet-based broker MoneyOnline, have launched, or are about to launch, products into the market.

First off the block was the Public Trust with its Wired Index fund. AMP is due to announce on Tuesday details of eight funds it plans to promote in New Zealand, and Challenger and Royal & SunAlliance are looking to roll funds out next month. Meanwhile, MoneyOnline is promoting a range of Barings trusts on its website.

To understand why this new wave of funds is washing up on New Zealand shores, it is necessary to step back a year to a decision taken by the Securities Commission, and to look at our muddled tax system.

A year ago, foreign-based funds could not, by law, offer products in New Zealand. The only exceptions were Australian-based unit trusts and UK-listed investment trusts.

The commission had, under the spirit of CER, given Australian funds an exemption from the law so they could promote their products in New Zealand with minimal changes to the documentation.

Buying a UK investment trust was the same as buying a share, as all the funds are listed on the London Stock Exchange (many have a New Zealand listing, too).

Over the years, New Zealanders have invested more than $1 billion in Australian funds, and a significant, but unquantifiable, amount has gone into UK-listed trusts.

Last year, the commission fully opened the door and essentially said any foreign, collective investment vehicle could be promoted in New Zealand, as long as a number of not-too-onerous criteria were met.

This decision is part of the reason managers are embarking on the promotion of UK unit trusts and OEICs in New Zealand.

The most important factor leading to this situation is that New Zealand funds are at a tax disadvantage because they have to pay capital gains tax on any gains they make - realised or not.

For this reason, UK-listed investment trusts, which are tax-free, have been popular with the more savvy investors. Often they have been described as "the best-kept secret" in the New Zealand investment market because of this tax-free status and the fact that they have low management fees.

However, they are not perfect. The main drawback is their structure, which often sees the shares trading at a discount to net asset backing.

UK-listed trusts are just like any other share in that their value is determined by whatever price an investor is prepared to pay on the market. In recent years, most trusts have traded at a discount because of some structural problems.

That is where the sudden enthusiasm for OEICs and UK unit trusts comes in.

These new vehicles (in fact, most of them have lengthy track records) are a combination of the best elements of both worlds.

They are like a unit trust in that they are open-ended and their value is set by the underlying valuation of their assets, as opposed to market sentiment; they do not pay capital gains tax; and they are generally big (read economically viable) funds with, in most cases, an established track record.

They may sound like the ultimate investment vehicle, but don't be fooled. While some managers are enthusiastic about these funds, others, including research houses, are more doubtful.

For two reasons, the Investment Savings and Insurance Association was not particularly thrilled with the Securities Commission's decision to allow other managed funds to be promoted in New Zealand.

First, it added yet another type of fund to the already extensive range on offer. That is an important point as one of the major criticisms of the managed-fund industry is the confusion caused by the huge number of funds available (around 400), and the many structures.

In fact, New Zealand has more managed funds per head than countries like Australia and the US, and their average size is much lower, and in many cases uneconomic.

In the past couple of years, managers have worked to reduce their range, and many funds disappeared as companies bought, sold and merged.

Second, and more important, the new funds undermine New Zealand's tax base. As they are UK-domiciled investments, the tax is paid in Britain, not to our own Inland Revenue Department.

The other point opponents make is that the tax-free status of these funds may not last.

Challenger International Group chief executive John Rowley believes that the Government will either remove the capital-gains-tax burden from New Zealand funds, thereby putting them on the same footing as the UK funds, or the UK funds will lose their tax-free status.

IPAC Securities general manager David van Schaardenburg reckons it will be the latter. He says it would be relatively easy for the Government to put the UK funds under the FIF regime, therefore forcing investors to pay tax on the gains.

Such a system is already in place with some other UK-based investments, he says.

One issue that remains unclear at this early stage is just how good these funds are.

Their promoters say they have far better returns than New Zealand-domiciled funds, and that would be true for most UK-listed trusts too. But sensible investors look at the risk as well as the return to see if the fund is suitable for their portfolio.

That raises the question of who is going to provide independent research on these new funds.

Mr van Schaardenburg says his company will not do that job.

Less clear is the matter of fees. One criticism of the new funds is that they are expensive, with entry fees of 5-6 per cent and management fees that are higher than in other types of funds.

The funds MoneyOnline is promoting have a full entry fee of 6 per cent, but this has been discounted to 3 per cent. But if you bought a New Zealand fund through the site there would be no entry fee.

Mr Rowley says the Australasian fund Challenger is promoting has an entry fee of 5 per cent and the adviser can rebate 3 per cent of it (therefore, the investor will have to pay at least 2 per cent). The management fee is 2 per cent.

Challenger's equivalent product, the New Zealand-domiciled Coronet Equity fund, has an ongoing management fee of 1 per cent and the entry fee of up to 5 per cent can be fully rebated.

According to the AMP Asset Management head of product and asset distribution, Simon Urquhart-Hay, these funds have benefits other than tax advantages.

In AMP's case, it is promoting funds run by its UK subsidiary Henderson Investors, which are complementary to the general international equity funds AMP has in New Zealand, such as the hugely popular WiNZ index fund.

While he will not give away which Henderson funds will be offered in New Zealand, it will almost certainly be sector or thematic funds such as the Ethical fund, the Technology funds, and the Japanese fund.

Tower Managed Funds general manager Richard Baker says investors need to weigh up carefully what these new funds offer before deciding."They are a little bit different. They are sexy," he says.

But it takes more than just good looks to make a meaningful relationship.

* Philip Macalister is the editor of online money management magazine Good Returns. Good Returns provides news on managed funds, mortgages, insurance, superannuation and financial planning.