New Zealand's rating drops in Morningstar analysis on fees and expenses for managed funds, with a risk of 'falling behind global peers'

New Zealand dropped to an 'average' grade in the latest Morningstar analysis on managed funds fees and expenses, a downgrade from an 'above average' rating in the last study in 2019.

The chapter on fees and expenses is part of the seventh edition of the Global Investor Experience (GIE) report.

“New Zealand has once again generated a satisfactory outcome but in a global environment of shrinking fees, the industry risks falling behind global peers, given the improvements in fees and expenses that other markets are making,” says Greg Bunkall, data director at Morningstar.

As well as ongoing costs, Morningstar looks at the overall investor experience of owning managed funds and how they compare against investment conditions in a total of 26 countries across North America, Europe, Asia, and Africa.

Managed funds put investment decisions in the hands of professional managers, rather than investors making those decisions themselves.

The most "investor-friendly" markets were Australia, the Netherlands and the United States while the lowest ranked markets - with the highest fees and expenses - were Italy and Taiwan, reported Morningstar.

In New Zealand, the Financial Markets Authority, as the regulator, requires the industry to assess the products they sell to be 'fair value," however there has not been any tightening of disclosure requirements since the last fees and expenses study.

Bunkall flagged transaction fee reporting as an area for improved transparency and also pointed out problematic asymmetric performance fees, where high management fees are disproportionate when funds are not performing well.

“New Zealand regulations continue to allow managed funds to charge asymmetric performance fees, based on what in our view can be inappropriate benchmarks, given they are not always tied to the underlying asset allocation of the fund”.

The most common way New Zealanders own managed funds is through KiwiSaver, of which banks dominate 80% of the market, says Morningstar.

There has also been a strong global uptake of Exchange Traded Funds (ETFs), which only make up around 2% of New Zealand's overall fund market, and the prevalence of these funds has lowered the fee burden in markets where they are popular.

ETFs are bought and sold on a stock exchange and offer multiple configurations, such as tracking individual commodities or diversified securities with specific investment strategies.