Morningstar's annual Sector Wrap shows New Zealand fund managers who invested significantly in the Aussie sharemarket did worse in the past year than those who invested more in local shares.

Only three of the 16 New Zealand and Australasian equity strategies assessed managed to outperform the NZX50 Index over the year to September 30 and none of these had significant Australian exposure.

"From the New Zealand perspective, it's difficult to ignore the record-breaking performance of the sharemarket across the ditch," the report said.

However, the last nine months were "something of a wake-up call" according to Morningstar.

"The S&P/ASX200 Accumulation Index returned -15.11 percent in $NZ terms (-12.40 percent in $A terms) over this period, compared to the NZX50 Index's 1.04 percent $NZ return.

"This has produced a 'perfect storm' for the portfolios with substantial Australian exposure."

The funds which produced the strongest performances over the past year were either heavily-weighted to New Zealand shares, or not underweight Telecom New Zealand, the report said.

"In the past, New Zealand fund managers have benefitted from increased exposure to a strongly-performing Australian sharemarket, and the ever-declining weighting of Telecom in the New Zealand market as a formula for 'outperformance'.

"The combination of outperformance by the New Zealand market, the strengthening $NZ, and a turnaround in Telecom's share price (which rose close to 22.0 percent over the six months to 30 September 2011) has led many of these trans-Tasman share funds to underperform their indices."

Morningstar said despite its recent poor performance, the Australian sharemarket's track record of great returns, broader spread of listed securities, and ease of access have prompted New Zealand fund managers to invest more there.

It said this has implications for performance reporting and assessment, and the calculation of hurdles for performance fees, because some invest in Australia but still use a New Zealand shares benchmark.