Investment returns in perspective.
Subject: Rate of return (Management)
Investments (Management)
Investments (Methods)
Author: Gawith, Andrew
Pub Date: 04/01/2010
Publication: Name: Kai Tiaki: Nursing New Zealand Publisher: New Zealand Nurses' Organisation Audience: Trade Format: Magazine/Journal Subject: Health; Health care industry Copyright: COPYRIGHT 2010 New Zealand Nurses' Organisation ISSN: 1173-2032
Issue: Date: April, 2010 Source Volume: 16 Source Issue: 3
Topic: Event Code: 200 Management dynamics Computer Subject: Return on investment; Company business management
Geographic: Geographic Scope: New Zealand Geographic Code: 8NEWZ New Zealand
Accession Number: 224932754
Full Text: Savers are always keen to know how their investment manager is performing and, when times are tough, investors can get pretty excited about how their investment manager is stacking up relative to others. Comparing the performance of investment managers is much easier said than done. Reported investment returns reflect a host of factors that can make comparisons nonsensical.

The government has recently moved to fast track changes to KiwiSaver reporting requirements, so members can accurately compare re[ums, fees and assets of each fund in a consistent and comparable manner. This sounds great--but let's look at some industry reporting standards and why they don't tell the full story. People think their reported performance is what their account would be worth if they dosed it. But there is difference between reported performance numbers and what an investor would actual[y put in their wallet. That difference is the cost of fees and taxes.

If all fund managers reported returns after all costs have been deducted, investors would be able to make much more accurate comparisons. But that's not how it happens. The current convention in New Zealand is to report re[ums after fees and expenses have been deducted but before Lax is paid--making the return look better than it actually is.

Let's have a look at how the tax bill can affect value of an investment, and skew the reported returns at the same time. Portfolio A reports a pre-tax return of 12 percent and Portfolio B reports a pre-tax return of 10 percent. Let's say the fund managers have invested in assets with different tax status, so Portfolio A's return is totally taxable and Portfolio B's isn't. The after-tax return would actually be 8.4 percent for Portfolio A and 10 percent for Portfolio B.

Despite performance data claiming to be after fees but before tax, read the fine print and you'll likely find not all fees have been deducted. The management fee will have been deducted, but there are other expenses that may or may not have been. These include custody, trustee, legal and marketing costs and so on. Published performance tables don't disclose what fees and expenses are or are not included in the calculation, and generally exaggerate the actual performance of an individual saver's account.

If the government is looking for a standard for reporting performance that's meaningful for savers, it should be after all fees, expenses and taxes have been deducted.

Column by economist and director Andrew Gawith, Gareth Morgan Investments
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