Restoring Confidence and Managing Investor Unsettledness
Presented at Asset Allocation and Portfolio Management Summit - March 2010
A challenging and complex issue. It seems that each economic crisis raises different issues affecting confidence and trust, requiring different answers.
In turbulent times the degree of confidence, guidance and leadership a fund manager demonstrates impacts heavily on the confidence and trust of investors and advisers, and on the retention of funds.
It is important to recognise that it is not only the investor that becomes unsettled in turbulent times, advisers also equally lose confidence and become unsettled – an unsettled adviser can be just as much a problem as an unsettled investor.
For NZ the problem of trust and confidence is potentially worse than other parts of the world as we start from a position behind other jurisdictions. NZ regulation when tested has been inadequate, the rates of various stakeholders unclear, reasonable questions exist regarding the quality of advice and financial reporting in the media is narrow with coverage limited to equities and fixed interest. Managed funds rarely rate a mention. When the global financial crisis struck the media was full of shallow comment re failing finance companies and mortgage trusts going into suspension. Little wonder investors become unsettled.
Briefly, what were the factors that damaged confidence in the global economic crisis and how have we reacted:
1. Dodgy lending practices by large and influential overseas lending organisations – Lehman Brothers, Fanny Mae, Freddy Mac, Northern Rock, Fortis?) and others.
An upward spiral of competition to lend resulted in companies that should have known better lending on over-valued properties to individuals who could not service the loans.
2. Liquidity crisis that resulted from international banks ceasing lending and calling in non-performing loans with little success.
A downward spiral in property values as forced sales escalated and banks realised they had serious capital shortfall problems.
3. In NZ from late 2008, bank lending dried up as NZ banks were no longer able or prepared to source overseas capital to fund property lending.
4. Bridgecorp Finance Company problems hit home – they go into receivership and a domino effect starts. No direction relationship with funds but the whole financial services industry is tarnished, especially advisers.
5. As finance companies topple – the weakness of the finance company model was graphically exposed:
• Debenture investment into finance companies slowed to a trickle following the Bridgecorp collapse/and then ceased following the Lombard collapse.
m-art-assetallocsummitt-restoringconfidencemanaginginvestorunsettleness-30.3.10 Page 3
• Property developers who had traditionally funded the development stage from finance companies were unable to access bank lending for completed developments, resulting in developers being unable to repay the finance company.
• Finance companies did not have the cash flow to repay debentures when due and breached their trust deeds. The liquidity crisis meant they could not find necessary additional capital.
• Property and particularly apartment values declined resulting in the forced sales resulting in loses to finance companies. (Many valuations have subsequently been questioned.)
6. Some mortgage trusts suspended due to limited ability to meet demands for early repayment.
7. ING/ANZ funds suspended.
8. Media comment focussed on finance company failures and $8 billion losses for investors.
9. World-wide – equity values decline substantially, and NZ interest rates dropped from previous internationally high levels.
10. Quality of financial advice and adviser competency questioned (often unfairly).
11. Effectiveness of Trustee model questioned (particularly oversight of finance companies).
12. Renewed call for greater transparency in managed funds.
13. Government actions:
• Introduces Government Deposit Guarantee Scheme.
• Announces major overhaul and tightening of regulation of trustees.
• Establishes Capital Market Development Task Force.
The underlying problems were very poor lending practices and a liquidity crisis.
Through the Global Financial Crisis (GFC) ‘KiwiSaver’ continued to grow strongly to the current 1.3 million investors with funds under management exceeding $4 billion.
To a large extent the pain of the GFC and the outflow of funds under management from managed funds were masked by strong growth and inflows to KiwiSaver, for many fund managers, particularly default providers.
It might be agreed the loss of consumer confidence and any unsettledness of investors appears to have been cancelled out/or overcome by the $1000 kick start, $1043 tax credit and employer contributions benefits available within KiwiSaver.
Steps the industry has taken or is taking to restore confidence and trust:
(a) Important of Quality of Communication
A number of fund managers have introduced specific ‘newsletters’ to advisers and consumers – outlining the nature of the GFC and how their fund is responding. They also highlighted the available 0800 number available for calls. – I understand that these efforts have been highly successful in retaining unsettled investors.
(b) Timing/Plain English/No Jargon
One area where the industry continues to let itself down is the regularity of communication and the highly technical presentation adopted. When market turbulence increases, the frequency of communication needs to also increase and the message become simpler.
If we don’t tell investors and advisers what is happening, or if the use of jargon confuses the message – investors in particular will fill the gaps with their thoughts which will generally be wrong. Too often it seems to me that information to investors often is written in a manner to suit the ego of the investment manager rather than to convey useful information to the investor. The most likely outcome from a confused investor, if they receive jargon riddled reports, is heightened alarm and a rush for the door. And that happened.
Looking to the Future - Steps the Industry is Taking to Build Investor Confidence
1. Simple disclosure of key information.
We have promoted within Government and Officials a simple single sheet disclosure of key investor information based on a Canadian example. – refer Appendix.
This is gaining considerable traction within the industry and with officials.
2. Review of Guidelines for disclosure of fees and charges
ISI has existing guidelines for fees and charges disclosure.
We are introducing upgraded Guidelines with the advantages of:
• Adopting the Australian approach of a template that ensures consistency of presentation (allowing easy comparison with competitors).
• And consistent description of the various fees (ie use the same terms).
• Also we are introducing a Total Expense Ratio (TER) based on the European approach.
• Overall we expect this to represent Global Best Practice.
3. ISI is reviewing disclosure of investment performance reporting
The ISI standard is overdue for review. We are researching the best standard available. Currently the Global Investment Performance Standard (GIPs) looks a likely contender – but it is very early days.
4. Asset Holdings Disclosure
It is surprising that funds do not already disclose ‘Top 10' holdings. This could be undertaken on the website to limit prospectus complications. We are encouraging members to voluntarily adopt disclosure.
5. Capital Market Development Task Force Report
Overall, the industry strongly supports the Task Force report. Particular items the industry is currently working on include:
• Identify the manager’s duties and responsibilities and ensuring these are properly discharged with statements to that effect on an annual basis.
• Unit pricing – we believe the industry does a good job in respect of unit pricing. However, we also accept that confidence would be increased if the industry set clear and published standards for unit pricing.
• ISI supports the concept of a single ‘super regulator’ – the overall performance of regulators and trustees through the global crisis has raised questions regarding effectiveness. Consumers need to be confident that regulator mechanisms can and will act quickly in the protection of the consumer.
6. Trustee Supervision
Given the Task Force’s clear direction on ensuring clear lines of responsibility and duties for fund managers and regulators, should we be considering a ‘Single Responsible Entity’ approach rather than the Trustee model that exists. [Note: This reflects a personal thought not an industry mandate.]
Vance Arkinstall
Chief Executive
Investment Savings & Insurance Association
March 2010
