Milford Funds, the public issuer of Milford Asset Management's retail funds, posted a 71 per cent decline in annual profit as the fund manager hired workers and incurred costs to introduce new processes in response to regulatory requirements.

Net profit fell to $4.4 million in the year ended March 31 from $15.1 million a year earlier, the Auckland-based company's financial statements show.

A 47 per cent increase in the management services fees to $26.4 million for the unit's parent, Milford Asset, was the biggest drag on earnings as the fund manager added staff and introduced the Charles River-hosted trading system to meet new licensing requirements of the Financial Markets Conduct Act (FMC) and changes to a suite of other regulations including anti-money laundering and fair trading rules.

"It's part of the regulatory environment - we needed to move and we have," acting chief executive Bryce Marsden said. "Longer term it will be good, but in the near-term, the next year or so, there will be teething problems and growing pains."


Fund managers were the last group to go through licensing in the new regulatory regime, which introduced new disclosure obligations and stepped up governance requirements in a raft of legislative changes aimed at restoring public confidence in capital markets.

Milford last year reached a $1.5 million settlement of a market manipulation probe related to former portfolio manager Mark Warminger, who is awaiting a hearing date.

The fund manager introduced a new trading system and beefed up its processes, which it accepted lacked adequate oversight at the time of the trades following a period of rapid growth.

Marsden said Milford's expansion has been organic with KiwiSaver the "growth product for pretty much the industry at the moment", and the fund manager now has a staff of 50 and more than $3.5 billion under management.

Milford Funds' fees fell 14 per cent in the 2016 year to $38.5 million due to the fund manager reaping a smaller performance bonus for exceeding its benchmark. Base management fees were up 22 per cent to $29.6 million, while the performance component more than halved to $8.9 million.

"The funds still performed, they got a performance fee generated so that means our clients continued to do well," Marsden said. "2015 was obviously an exceptional year for everybody."

The main focus recently has been getting through the FMC transition and now we'll turn our attention to other things like products.

Fund management fees are capped at between 0.65 per cent and 1.35 per cent of funds under management, while performance fees range from 10 per cent to 15 per cent of any gains above a fund's investment target.

Milford's diversified income fund generated a return after fees and before tax of 9.6 per cent in the year ended March 31 compared to 17 per cent in 2015, while the active growth fund, managed by executive director Brian Gaynor, posted a return of 8.5 per cent in 2016, down from 12 per cent a year earlier.


Milford Funds paid a smaller dividend in the year of $7.2 million compared to $12 million in 2015, though the payment was still up from 2014.

Marsden said now the regulatory projects have been completed Milford will start looking at its product mix and see what it can do to grow the business.

"The main focus recently has been getting through the FMC transition and now we'll turn our attention to other things like products," he said.

Marsden is acting as chief executive until Troy Swann takes over the reins at the end of October, replacing Anthony Quirk who retired as an executive in June. Swann has been the general manager of boutiques and joint ventures at NAB Asset Management.