This article was published on 2 June 2009. Some information may be out of date.

Nyah nyah to Morningstar

One aspect of the recent Morningstar report on investors’ experience of managed funds — in which New Zealand came bottom out of 16 countries — got little coverage in the news media. Ironically, it’s about media coverage.

“Our findings show that the media in most countries rarely indicate when a fund’s costs is high,” says the report. “Fees and expenses eat away performance, and the media ought to educate investors on the topic.”

It continues: “The media do not sufficiently educate investors on the benefit of long-term investing, and evaluating manager records on long-term history rather than short-term performance.”

Looking at New Zealand specifically, the report says, “We recommend that the press pay more attention to these topics.”

The first point may be fair enough. Certainly, I can’t claim to write about high-cost funds, because I almost never write about any individual funds.

But I do say often — including in my book “The Complete KiwiSaver” — that fees make a big difference. “Take, for example, a non-employee investing $20 a week into KiwiSaver in a high-risk fund that returns 6% a year after tax,” the book says. “If fees are 0.5%, after 30 years the savings will total about $162,000. But if the fees are 2%, the savings will total just $124,000. It’s not stupid to make fees THE major consideration when you are choosing a provider.”

I go on to say that “The only trouble is there is no really good way of comparing fees.” That’s an issue the government is looking into. Hopefully New Zealanders will soon be able to easily work out how high total fees are on all managed funds.

On the second point, I feel a bit peeved, although I must admit that most of the New Zealand media have been naughty about judging short-term KiwiSaver performance.

Predictably, as the scheme has caught on, people want to know how well the different funds are doing. In my recent reader survey, someone who is in KiwiSaver said they would like “Tables showing how different provider funds are progressing and making easily understood comparisons between similar funds.”

Another reader said they might be encouraged to join KiwiSaver if there were “A regular independent review of the providers showing the performance of each (taking into account all fees charged by each provider). Perhaps this is something that could be posted to on a regular basis.”

It sounds great, but I hope it doesn’t happen. Or at least not until KiwiSaver has been around for at least five years, preferably ten — and even then only if long-term numbers are shown.

You can be badly misled by looking at the short-term performance of any managed fund, within KiwiSaver or not. People often move their money into funds that performed well in the last period. And lots of research shows this is frequently a bad move.

To quote from my book again, “The most important point here is that last year’s — or last half-year’s or last decade’s — best performing funds often don’t do all that well in the future. In fact, some research finds there’s a tendency for them to do worse than average — perhaps because they tend to be high-risk funds, which are more likely to do particularly well AND particularly badly. People who move their money around frequently end up worse off than those who don’t.”

So there you have it, a middle-aged writer saying “Nyah, nyah” to Morningstar.

On a more positive note, whether or not Morningstar was being fair, it’s two messages are good ones. And they’ve now had another airing.

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Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.