Paul Gregory. Photo / Supplied
OPINION:
New Zealand's capital markets are important to the functioning of our economy because, by functioning efficiently and effectively, they are an engine for allocating risk to those best able to manage it.
The Capital Markets 2029 Report cited extensive evidentiary backing for the role capital markets play "spanning productivity and the wellbeing of citizens".
In turn, New Zealand's fund managers play a critical role connecting New Zealand and global capital markets to New Zealanders.
The piece of the funds management sector licensed by the Financial Markets Authority (FMA) has approximately $170 billion under management — $90b in KiwiSaver alone.
In 2018, the NZX reported that 24 per cent of the listed equity market was taken up by local managed funds.
This market footprint will increase with fundamental, ongoing benefits for New Zealand and New Zealanders.
Fund managers provide capital to public and, increasingly, private companies and are a growing influence on New Zealand corporate governance. Active managers serve a critical price discovery role in all capital markets.
Still more fundamentally, fund managers are a vehicle for New Zealanders to participate in capital markets to fund retirement, a first home or other long-term goals. FMA surveys show funds are increasing as a preference for investment access, with 17 per cent of respondents indicating they have managed funds in 2022. Some of these investors will also have KiwiSaver as part of their portfolio.
Fund management is the main channel, other than owning a home, for New Zealanders to meaningfully engage with their own future. As home ownership becomes a tougher goal, fund management will become more important in this respect.
Plus, while New Zealand fund managers are mostly invested in listed public debt and equity markets, they can also be a gateway for New Zealanders to diversify their investment choices and invest directly; and/or to use fund managers to access a broader selection of asset types, including private companies.
Ongoing investment through managed funds should contribute to deepening and broadening New Zealand's capital markets and grow the scale and maturity of New Zealand investors. This will take time and, over that time, New Zealanders will also gain more experience of investing through fund managers. If this is positive and New Zealanders develop confidence fund managers will treat them fairly and deliver what they expect as investors, market participation will continue to be robust. If not, it threatens the stability — and potentially eventually the existence — of capital market growth. A loss of confidence in capital markets arising from a poor experience of fund managers, is most likely to lead to widespread reduction in participation. New Zealanders will retreat to the sidelines — as they did in 1987.
This is why licensing and vigilant regulatory oversight of fund managers is important.
This is why the FMA pays strong attention to fund managers' investor outcomes, their conduct — primarily manifest in risk management capabilities and controls, the clarity and integrity of their communication and the existence and quality of their value for money — and the root causes in fund manager business models and governance.
This is evident in recent FMA guidance and work to influence fund managers including:
• Value for money
• Advertising and marketing
• Integrated financial products and greenwashing
• Cyber resilience
• Liquidity risk management
The FMA's work, conducted alongside the fund manager supervisors, stands in the shoes of New Zealand investors who do not have the knowledge, clout, time or inclination to scrutinise whether fund managers are acting in their interests and, if not, to call fund managers to account. Our work is also mindful, however, of the opportunities for New Zealand investors arising from genuine innovation.
The FMA is unapologetic about acting on poor or weak practice, poor value or New Zealand investors being confused or misled. Substantially because it helps differentiate fund managers doing none of those things. But we do not confuse that work with preventing access to investment providers and products with a genuine investment proposition and robust risk management, even if they are novel, relatively expensive — which is not the same as poor value — and/or relatively complex.
All of this is especially important as market conditions introduce uncertainty and the potential for a skew to unwelcome and possibly surprisingly poor outcomes for New Zealand investors. Market conditions themselves are beyond fund managers' control but how they respond to them is not.
For active fund managers, competent management of market risk is their job. While passive fund managers are effectively receivers of market conditions, they can be active in their narrative: to explain — before, during and after market volatility — how passive management styles interact with market movement, the consequences of that for investors at different risk settings and what investors should and should not do in response.
Confident participation in fair, efficient and transparent markets is critical to the FMA's purpose and mandate.
The FMA and fund managers are ultimately aimed at the same financial, economic and broader societal outcome.
• Paul Gregory, is director investment management at the Financial Markets Authority.