Andy Mahony addresses a few key questions for investors about how a managed fund is valued, how the underlying investments are priced, and what safeguards are in place to reassure investors their assets are being looked after appropriately

The first half of 2022 has been a tumultuous one for investors. The following Q&A aims to provide guidance for investors on how a managed fund is valued, how the underlying investments are priced, and what safeguards are in place to reassure investors’ that their assets are being looked after appropriately.

The information included in this article is of a general nature and is not a substitute for tax or financial advice. If you require tax or financial advice, we recommend you contact your tax specialist, Inland Revenue, or your financial adviser.

1. Can you claim a tax deduction for the fees charged by the fund manager of a portfolio investment entity (PIE)?

This information can be gained from your fund manager or IRD. A fund manager generally has a document titled ‘Understanding your PIE Tax Statement’. Ongoing management and administration fees will generally be accounted for within the PIE structure through cancellation of units within the PIE fund. Anything tax deductible should be detailed in the PIE Tax Statement.

The IRD provides a tax summary here on portfolio investment entities (PIEs): “The most common type is known as a multi-rate PIE (MRP). Investors in these PIEs will notify the MRP of the prescribed investor rate (PIR) that relates to their situation. The MRP attributes income to the investor and calculates its PIE tax using the investor’s PIR. The MRP adjusts the investor's account by that amount of tax.”

The IRD also has information for resident individuals who invest in PIEs here.

2. How are the managed fund fees worked out within the PIE structure? Do they net off with any other aspects of managing the fund? Are the fees ring-fenced for what the investor is obligated to pay for?

The fund manager will have a policy that describes unit pricing and valuation. The following explains the principles used to value the underlying investments, and the calculation of a unit price which effectively aggregates the value of every underlying investment. This unit price is reduced by fees, costs and expenses needed to manage the fund.

The investors’ interest in the managed fund is based off the unit price. The higher the number of units an investor has, the larger their interest in the managed fund.

The key thing to remember is, there are moving parts:

• The value of the underlying investments change constantly.
• The number of units change as investors go in and out of the managed fund.
• Both points above will change the unit price.

The unit price is calculated by taking the total value of a managed fund’s assets on a particular day, adjusting for liabilities, and then dividing the net fund value by the total number of units held by all investors on that day.

The unit price calculations are undertaken by an entity that is separate from the fund manager. This entity is known as the ‘Administration Manager’. Every fund manager discloses the Administration Manager in the Product Disclosure Statement (PDS). For example, a few commonly used Administration Managers in New Zealand are Adminis, Trustees Executors, and MMC.

3. How are stock dividends and bond coupons accounted for and distributed (if at all) to the end investor in a PIE? How does this compare to the capital return?

A managed fund can generate income and capital gains for unitholders in multiple ways. Receiving stock dividends, bond coupons, interest from cash, selling investments at a higher value, or earning income from investing into other funds will generate income for the overall managed fund. The collective value of the income and capital gains will be included in the calculation of the unit pricing explained above.

If the managed fund distributes any of the income generated, these distributions tend to occur after the end of a quarter (e.g. after 31 March, 30 June, 30 September, 31 December). The distributions will be held as cash before being paid out to the investor.

The fund manager will account for income (bond coupons, dividends, interest) and the capital return (realised/unrealised gains/losses from investments) most commonly on a daily basis for PIEs. Be aware that the value of any income generated may not outweigh the value lost from falls in realised/unrealised capital, so the unit price may fall like it has through the first half of 2022 for many PIEs. The mix of the underlying investments will determine how much of the managed fund value is attributable to income or capital gains.

4. Ultimately, how can an investor be reassured that the investments are being accounted for without full transparency of the portfolio?

The Financial Markets Authority is responsible for regulation of the financial markets in New Zealand. The FMA undertook a review of pricing/valuation practices within managed funds across the NZ market in 2018. The report is a few years old now, but it shows the elements of valuation and pricing that require oversight. The report is available here: MIS manager valuation and pricing practices.

Of note in the report is the reference to the International Organisation of Securities Commissions (IOSCO) principles. The principles are reflected in the licensing criteria for fund managers in New Zealand “where there are minimum standards for asset valuation, pricing and outsourcing”.

For specific products, the section titled “Who Is Involved?” within the PDS is where the following entities are disclosed:

• Supervisor – provides oversight of the performance of the fund management functions
• Custodian – holds the assets of the fund independent of the fund manager on behalf of investors
• Administration Manager – performs unit pricing, registry, fund accounting

Historical portfolio holdings are published on the FMA website (here and here) but only show the top ten holdings and can be a little dated. However, this does allow some oversight as to which fund manager is holding what at a historical point in time.

Research IP undertakes qualitative research by interviewing fund managers and analysing the following information (a lot of this information is available through the RIPPL Effect reports on the interest.co.nz website):

• Information on the investment team, performance, funds under management, proxy voting, platform availability, risk management, decision making processes
• Portfolio holdings
• Asset allocation history
• Portfolio attribution
• Daily unit price history
• Fund Capability Statement, SIPO, or FSC document and Other Material Information documents as they apply
• ESG, Community support or engagement policies
• Annual internal controls report in relation to compliance with the Auditing and Assurance Standards Board’s Guidance Statement 007 (GS 007) (or international equivalent SAS70 or ISAE3402)

For direct property assets: property valuation summary, leasing profile summary per building, changes in property ownership (for co-owned properties) and reasons for the change.

Access to the RIPPL Effect reports is here.