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FMA Releases Report Into Active And Passive Fund Management

The Financial Markets Authority (FMA) today published an independent report into the passive and active investment management styles[i] used by KiwiSaver providers.

The FMA commissioned MyFiduciary to test the extent that KiwiSaver providers were active or passive managers of their funds, whether this aligned with any claims to be “active” or passive” managers, and how this compared with the fees being charged.

The report finds that most KiwiSaver providers’ funds are ‘true to label’ in terms of their approach to investment management.

Liam Mason, FMA Director of Regulation, said: “The report found that there is not a significant relationship between the level of active management employed by providers and the fees they charge. The report shows there are a small number of funds where the high price doesn’t necessarily match the level of active management being claimed.”

This report is part of FMA’s broader focus on value for money in KiwiSaver. KiwiSaver providers have told the FMA that the way they manage their investors’ money is a critical part of their value proposition for their members.

In assessing the level of active management delivered among the 26 schemes considered, versus what was promised, two-thirds described themselves as mainly active but varied considerably in how active they were, with some of these appearing relatively passive.

The remaining schemes described themselves as mainly passive or mixed, and were generally true to label.

The report shows that active management can be offered without higher fees. It also highlights that some providers are offering expensive funds that are not actively managed. Given this, there are a small number of providers that appear to be poor value for money relative to other providers, based solely on activeness and fees charged. There are however aspects of “value” to customers beyond levels of active management.

MyFiduciary established their own criteria, in consultation with the FMA, for assessing the levels of active management. The report helps provide an independent measure and assessment of whether active management is a key factor in how managers determine their fees.

FMA’s response
The report raises a number of issues that the FMA will be following up through its supervision and monitoring of providers, and by producing new guidance for the industry to improve disclosure and outcomes for investors.

· The FMA will engage with those managers where fees were high and the level of active management was relatively low.

· The FMA will produce industry guidance covering expectations around KiwiSaver fees and the statutory requirement for fees not to be unreasonable. The requirement for KiwiSaver fees to not be unreasonable is an ongoing obligation that providers should periodically review, to ensure compliance and that they are acting in the best interests of their members from a value for money perspective. The FMA has regulatory tools available to take action in this space, including consequences under KiwiSaver manager licences.

The FMA has separately considered where and how information on investment style is being disclosed and if that information is sufficiently accessible to KiwiSaver members. There is a requirement in the regulations to disclose investment strategy to investors in important documents such as Product Disclosure Statements (PDS), Statement of Investment Policy and Objectives (SIPO) or other communications materials. The FMA’s view is that there is insufficient information readily available in the PDS for investors to make meaningful decisions about their funds based on whether they are actively or passively managed. The FMA will consider covering this aspect in its planned guidance.

Mr Mason said, “We were pleased to see the report showing a wide variety of choice available to investors and that in a number of cases there are passive funds offering a lower cost product, and in other cases that active management is being offered at a competitive price.

“From the information in this report, it appears that investment management style is not necessarily a key factor in how providers, or consumers, are determining value for money for the majority of funds on offer. We’ll be doing further work in the future to explore how KiwiSaver providers are delivering value for money.”

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