About ten years ago I gave a presentation at a funds management conference where I espoused the notion of New Zealand becoming the “Edinburgh of the South Pacific”.  While London dominates the investment management industry in the United Kingdom, Edinburgh has a vibrant and well established funds management industry, albeit on a smaller scale.  I saw the potential for New Zealand to perform a similar role in this part of the world, recognising that Sydney dominates the investment industry in Australasia.

Back when I made the conference speech the concept of New Zealand becoming the “Edinburgh of the South Pacific” was more of a hope than an expectation.  However, there have been positive developments over the past year, which mean that there is potentially a positive future for funds management in this country.  These include:

- KiwiSaver.  This is a proactive move to increase savings, diversify New Zealand from its over reliance on housing and build a larger base of domestic investment capital.

- The PIE (Portfolio Investment Entity) regime.  The good news is that unit trusts are now very tax effective savings vehicles, combined with the benefits that should come with a professionally managed fund such as diversification, risk management and good long-term returns. 

But with these opportunities comes responsibilities and I wonder if the investment industry is blowing its biggest opportunity in decades.  The issues boil down to 3 P’s: performance, products and planners.

- Performance.  The reality is that over the past decade many unit trusts have struggled to beat returns from the bank through a combination of average investment performance, tax inefficient vehicles and relatively high fees.  This has to change with more focus and transparency on the after fee returns the investor receives when compared to other investment alternatives such as simply parking money in the bank.

- Products.  Many current product issues stem from finance company debentures and CDO and mortgage backed funds.  Part of the problem is a misconception of the products’ risks and contributing to this is the issue of whether the products have been designed to cope with all market environments and are “true to label”.

- Planners. In a well functioning funds management industry there needs to be a respected financial planning sector that investors feel confident in using.  Unfortunately some planners seem to have been driven more by factors such as the commission structure or sales targets than what is best for their client.   Government disclosure rules should help here but the planning industry must also play its part by more proactively not tolerating poor practises and moving to a “best practice” model.

The good news is that none of these issues are insurmountable.  However, they must be addressed if the funds management industry and, most importantly, its clients are to benefit from the more positive framework that now exists for investment savings in this country.

Anthony Quirk, 23 April 2008