Will the new rules see growth here in New Zealand?
It is now much easier, and less expensive, for funds to list on the NZX. Existing fund managers expressed support for the change to the NZX listing rules to facilitate more fund listings — but there hasn't been a rush to market yet. Listed funds, and especially exchange traded funds (ETFs), are growing at a huge rate internationally. Will the new listing rules see growth here in New Zealand?
NZX completed its review of the listing rules at the end of 2018. Issuers have been able to take advantage of the updated rules since January 1, this year.
The NZX had five key objectives in its review, including an objective to accommodate the listing of a broader range of financial products and issuers with fit for purpose rules for small to medium size issuers, funds and debt issuers.
NZX introduced bespoke rules for funds to reduce compliance costs for fund issuers while targeting the key investor protections that deliver value. NZX recognised its model was underdeveloped compared to New Zealand's global peers.
Tailoring rules for fund issuers presented an opportunity for market development.
So why would a fund issuer consider listing on the NZX? NZX promotes four key reasons based around providing greater liquidity and distribution opportunities. Liquidity — the listed market provides investors with access to a secondary market which is not readily available for unlisted financial products.
Distribution — listing on the NZX increases the profile of funds and reaches a wider audience.
Regulatory environment — the regulation around listings can promote market integrity of the funds.
Efficiency — with bespoke rules for listed funds, the ability to enhance distribution, visibility and promotion of funds under a right-sized governance regime can be attractive.
The new rules for funds are expected to significantly reduce the initial and ongoing compliance costs associated with listing a fund.
Funds which are already registered under the Financial Markets Conduct Act will be able to list on the NZX using existing documents. Ongoing reporting and continuous disclosure requirements of the NZX can be met by the funds' annual reporting and fund update obligations. Under this streamlined approach, NZX has reported that it expects the total cost of listing a fund to reduce to about 10 per cent of previous levels.
There are currently just over 30 fund securities listed on the NZX. Twenty-three of these are NZX's own ETFs — with another eight of these expected to list in June. This is in stark contrast to the experience in Australia and globally where the rise in listed funds, especially ETFs, has been phenomenal.
Figures released in Australia for the end of the March quarter show that the Australian ETF industry reached a new record high of $46.1 billion in funds under management. This represents a quarterly growth rate of 13 per cent.
According to data released by London-based ETFGI (an ETF research and consultancy firm) it has taken just five years for the amount of money invested globally in ETFs and products to more than double to an estimated US$5 trillion.
There is clear evidence that in Australia and internationally ETFs are massively popular. However, even with the tailored rules NZX has introduced for listing funds it does not necessarily follow that New Zealand will follow that rapid rise.
Internationally ETFs are popular for two key factors — cost and diversification. However, in New Zealand, our portfolio entity investment tax regime may undermine the attractiveness of a listed fund for some.
So what does it all mean? Will the change to New Zealand's listing rules for funds create a new market for fund issuers and an increase in listed funds?
The reduced compliance costs, and ease of listing under the bespoke rules, certainly make the concept of listing a fund much more attractive. This factor, together with the cost of alternative distribution models and increased focus on the governance and regulation of those distribution models, must also play a role in considering whether to list a fund.
The industry was certainly supportive of the NZX amendment to the rules for listing funds — but it remains to be seen whether the industry takes full advantage of the opportunity.
● Catriona Grover is a financial services partner and board member at Kensington Swan.