Brent Sheather: Tenz deserves a bigger push

The subdued popularity of Tenz must puzzle the NZX.

The Tenz fund is a NZ Stock Exchange listed fund which invests in the 10 largest NZ companies - Telecom, Contact, Auckland Airport.

It is one of three index funds promoted by its owner, the New Zealand Exchange under the "Smartshares" scheme, which is designed to simplify owning and trading shares on the local market.

The nation's 3813 Tenz shareholders have just received the 2004 annual report. It disclosed that despite returning 18 per cent in 2004 and beating the pants off most other managed funds, over the last three years Tenz has shed 1524 shareholders and $5 million in assets under management.

Overseas exchange traded funds are hugely popular, particularly with institutional investors, and they regularly feature as the most traded stocks on the New York Stock Exchange and Nasdaq.

Back home Tenz shares are traded thinly and are characterised by wide spreads between the buy and the sell price, making it potentially expensive to deal in. Institutional brokers are notable by their absence.

This lack of interest is a pity as one of the main attractions of the Tenz fund relative to its unit trust peers is its very low fees, which brings us back to that annual report. It's attractively presented with all sorts of graphics but it fails to communicate some of the Tenz fund's key advantages.

This is particularly unfortunate because, as the Tenz fund doesn't pay upfront fees, trailing commissions or sponsor financial planning conferences in exotic locations, just about no one else in the country has a good word to say about it.

First and foremost among the attractions of the Tenz fund are its low running costs.

But not only would you not know that from reading the annual report, it doesn't even publish basic details of its management expense ratio.

This figure is the total annual operating costs excluding brokerage expressed as a percentage of total assets. Overseas this information must be disclosed by law and even here in the wild west most of Tenz's higher cost competitors manage to do the right thing.

So why haven't the smart operators at the NZX got the fund's ratio on the front page in huge letters? A cynic might even think it's not there because the numbers are so bad. After all, NZX shares are suspiciously high. However the cynics would be wrong - not only are Tenz' cost overheads low, they exclude all other operating costs other than the management fee.

Instead the good old NZX picks up all the other costs - trustees' fees, legal fees, all other costs. In the rest of the marketplace the poor trust unitholders are stuck with what is really an open-ended fee arrangement. For example if, hypothetically, a fund manager of the year hires a law firm, at huge expense, to silence a vocal critic, it's the unit trust owners that pay.

Not so with Tenz - back in 1996 when the NZX gave birth to the Tenz fund and threatened a now defunct unit trust research firm with legal action because of some derogatory (not to mention stupid) statements about its new baby, it was the NZX that picked up the costs.

Tenz fees start and end with the management fee - 0.6 per cent a year for most of us and just 0.2 per cent if you have 500,000 shares or more.

Compare that with the 2 per cent or so typical of the rest of the local industry.

But wait, the good news for Tenz unitholders doesn't stop there, although again you wouldn't know it from the annual report.

One of the more insidious cost overheads born by unsuspecting managed fund investors is the brokerage incurred by the fund when the fund manager trades the portfolio. Extraordinarily, with the Tenz fund, these costs are paid for by NZX.

Turnover of actively managed funds can be upwards of 50 per cent a year so this is another meaningful, if confidential, saving for unitholders.

The table compares Tenz' total annual costs (where total annual costs is equal to the management expense ratio plus portfolio turnover costs) with that of some other NZ equity oriented managed funds.

However so as to pre-empt any squeals of protest note that these ratios are retail figures and lower fees can be negotiated by some mastertrusts.

Some might however like to reflect that in order to get these "low" figures the investor must incur additional mastertrust fees of 1 to 2 per cent. Alas there are no free lunches in this world.

So why isn't Tenz the biggest managed fund in the country?

Some of the blame for the disappointing growth must be borne by the stockbroking fraternity, some of whom appear disinclined to produce a genuinely diversified portfolio for clients.

The NZX needs to develop Tenz and its other index funds because relative to many of its Australian and US counterparts it still has high fees and institutional investors certainly aren't going to come to the party until liquidity improves.

* Brent Sheather is a Whakatane-based investment adviser. He is a Tenz and NZX shareholder.