Submissions closed last week on the FMA’s draft guidance on fees and returns from managed funds.

The FMA said it saw some inconsistency in how performance-based fees were disclosed in disclosure statements under the Securities Act, and how managers were calculating 0% PIR returns and fund charges.

It said it was particularly concerned about managers who used a performance-based fee without a high-water mark, or fees linked to inappropriate benchmarks. 

“The FMC regulations require managers to provide an example of how fees apply to investors. Within the example, managers must disclose the effect of any applicable performance fee," it said.

The FMA said if there was no high-water mark, that should be clearly disclosed in PDS documents.

It also wants it clearly explained to investors what benchmark the performance fee is linked to.

“Some funds currently base their performance fee on a hurdle rate of return linked to a market index that does not fairly reflect the asset class and risks of the underlying investments. An example is equity-based funds that use a 90-day bank bill index as the hurdle rate of return. A fund could underperform against the appropriate market index but will still be paid a performance fee. “

The FMA said when an inappropriate index was used this should be made clear so investors could understand the implications of that.

It gives examples of the kind of disclosure wording that could be appropriate.

John Berry, of Pathfinder Asset Management, said he supported the FMA. “If you manage a equity fund and you use a cash benchmark, that needs to be spelt out really clearly for investors.”

He said it was not sufficient to leave it to the industry to come up with a solution to how that should be explained because it had already had a number of years in which it could have done that. "In my mind there is no issue if a manager chooses to structure a certain way but that has to be disclosed in a way that people can understand."

But David Ireland and Catriona Grover of Kensington Swan, made a submission saying it was incorrect for FMA to describe such benchmarks as “inappropriate”.

“This is a commercial matter, and should not form part of FMA’s regulatory guidance. Provided the hurdle rate is clearly identified, and where it differs from the appropriate market performance measure that distinction is clearly and effectively disclosed, that should be the end of the matter. Hurdle rates that must be surpassed before a performance fee is charged may differ from the relevant market index measure for a number of commercial or marketing-related reasons, many of which may be reasonable.”

Fund managers were also concerned by a direction they disclose the charges of all underlying funds, including unit trusts, super schemes, managed investment schemes, property funds and exchange-traded funds.

Andrew Bascand, of Harbour, said he had asked for clarification on how that would apply to listed and unlisted property trusts. “What’s the fee, how do I disclose that?”

Rebecca Thomas, of Mint, said it would be hard for managers to assess those costs for property trusts and they would not be expected to report on the costs of investing directly in any other listed company's shares.

But she said listed property trusts were different from other shares because they benefit from the PIE tax regime.

Berry said it would also be a problem if there was ever a listed private equity vehicle in New Zealand.