Brent Sheather: Kiwi fine print vexing investors

Richard and Jane are now in their early fifties and with the children more or less off their hands have decided they had better get serious about saving for retirement.

From the web they download the investment statement of a New Zealand unit trust managed by one of the largest fund managers in the world. A friend tells them that two key areas to focus on are 'returns' and 'annual fees'.

Armed with this knowledge they read the investment statement. Sure enough they come to a section entitled "What Are The Charges?"

They read about the various annual fees - the management fee is 1.5 per cent, trustee fees are 0.1 per cent and there are other expenses which are unquantified. They then come to the management expense ratio, which they are told is a total of all the fees and expenses.

However, Jane notices that the ratio is inexplicably less than just the management fee by itself. She then reads that the data is two years out of date.

A little disheartened they move to the page entitled "What Returns Will I Get?" Here they are told that their unit trust will earn income (unquantified) less fees (unquantified) and taxes (unquantified).

Richard and Jane look at each other, throw the investment statement into the bin and contact their real estate agent with a view to purchasing an investment property.

In more civilised countries like the United States and Britain, Richard and Jane might have got a bit further in developing a balanced retirement plan.

Over there setting out the key facts is taken more seriously by fund managers, not because they are good guys, but because it is the law.

It is a sad fact that many Kiwi institutions would be breaking the law if they tried to sell their unit trusts in the US.

We have all heard about the globalisation of investment but the globalisation of standards has yet to reach our shores.

What is more in the UK levels of disclosure for managed funds are about to get better still. The chief regulatory authority, the FSA, has just announced proposals which will require UK fund managers to provide straightforward, plain English answers to the very questions which proved so elusive to Richard and Jane in New Zealand.

The new proposals require all new investors to be given a simplified prospectus (SP). It is rather like the investment statement available to New Zealand investors with one novel twist - it contains useful information, much of it summarised on one page.

Specifically, the new format gives investors a realistic idea of the returns they can expect, whether the product is invested in cash, bonds or shares, then requires the total annual expenses (expressed as a percentage) to be deducted to give a return after fees. This format puts fees into perspective by first disclosing them then deducting them from a realistic estimate of returns.

Virtually all types of managed funds will need to provide an SP permitting easy comparison across products.

The second innovation in prospectus is detail of a portfolio turnover figure, which will give investors an idea of how rapidly their fund manager trades their portfolio.

The FSA notes that buying and selling shares is an expensive pastime and turnover thus gives important clues as to the real cost of investing. In NZ this information remains a mystery to most people.

Lastly the FSA requires managers to detail performance of a relevant benchmark, so investors can see how good or bad the fund manager has performed relative to buying an index fund.

The poor standards of disclosure in the managed fund sector don't just relate to returns and costs. Risk is also often materially misrepresented - no doubt a contributing factor as to why so many Mums and Dads back out of managed funds when markets turn down.

Local fund managers need to look at best practice overseas and give consumers what they need instead of just lobbying the Government to make long-term savings compulsory.

* Brent Sheather is a Whakatane-based investment adviser

DISCLOSURE IN BLIGHTY

* UK disclosure obligations on managed funds are tougher than New Zealand's.

* All new investors to be given a simplified prospectus, giving investors a realistic idea of the returns they can expect.

* They must also detail how often they trade and provide details of the performance of a relevant benchmark.