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Fund spy: Why Aussie funds don't tell you what stocks they own

Glenn Freeman  |  06 Nov 2019Text size  Decrease  Increase  |  
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The watchdog has again delayed its requirement for super funds to reveal what's in their portfolios.

The Corporations Act amendments that would force super trustees to publish these holdings online were due to come into effect by 31 December 2019, though this date was last Wednesday rolled forward to the end of 2020. The deadlines have already been extended three times previously - in 2017, 2016 and 2015.

But in any case, this attempt at super trustee legislation may be an example of putting the cart before the horse. Even if super funds are made to tell members exactly what assets they're buying with members' money, there will be no such obligation for fund managers.

Fully transparent super fund holdings mean little without similarly transparent managed funds, which comprise a large portion of many retail super funds. This would arguably be a more logical place for the regulator to start.

Regulator kicks the can again

ASIC's latest kicking of the can further down the road has drawn sharp criticism from senior industry figure Jeremy Cooper. Now Challenger's chairman of retirement income and the former deputy chairman of ASIC, he is perhaps better known as the author of the Superannuation System Review Final Report, known as the "Cooper Review" - which was handed to the federal government almost a decade ago, in June 2010.

Australia is the only country out of 25 surveyed in Morningstar's Global Fund Investor Experience Study - conducted every two years - where funds aren't required to give investors a full accounting of what assets they hold.

This was the case in October 2017, when the last study was completed, and remains so now, according to early indications from Greg Bunkall, data director of Morningstar's global fund data team.

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He suggests the results for the disclosure portion of the report, which includes portfolio holdings, will be near identical, "given it is the only market in the study where the regulator doesn't already require funds to divulge their underlying asset holdings."

"We're not talking about these holdings needing to be divulged in real-time, of course there needs to be a lag.

"But in the US, mutual funds have been disclosing their holdings since the 1940s - it's a cornerstone of the 40 Act regulations," Bunkall says.

How Australia stacks up against US, UK

The 1940 Investment Companies Act, commonly referred to as the "40 Act", lays out the regulations US investment companies must abide by when offering pooled investment funds, including mutual funds (US and UK) and managed funds (Australia).

In the UK, the regulator requires full holdings to be publicly disclosed to retail investors at least once a year in a fund’s annual report.

Holly Black, senior editor of Morningstar.co.uk, says this delay is "a huge bugbear of mine, because the holdings list can be six months out of date when published, meaning investors may be working with 18-month old data before the next update is given."

But the situation is still far superior to that in Australia. What’s more, a higher proportion of funds in the UK voluntarily disclose their full holdings more regularly. Morningstar's Bunkall says this largely comes down to a strong self-regulatory movement by various industry associations, which require higher standards of holdings disclosure by their member organisations.

In Canada, mutual funds must disclose their holdings to the regulator every quarter, under regulations enforced by the Canadian Securities Administrators.

Why are Aussie funds holding out?

There are a few reasons the local industry has so far dodged a requirement to divulge their investment holdings, including:

  • A lack of political will, especially given the higher-level priority to weed out bad apples of the financial advice sector. The revolving door of Australian political leadership is also a factor.
  • Strong lobbying from groups such as the Financial Services Council, whose membership includes some of Australia's largest, most capitalised banks and financial services companies.
  • Protecting intellectual property is possibly the fiercest argument against full portfolio transparency put forward by groups such as the FSC and fund managers.

But transparency is a key standout in research from Morningstar in the US looking at why new funds succeed or fail, in a whitepaper titled The Rise and Fall of New Funds.

"One of the key findings was that the more frequent portfolio data was available, the more flows [of investor money] they got.

"So that plays into the whole theme around transparency creating trust, confidence and flows," Bunkall says.

Fund family flows for Australian-domiciled managers

 fund flows

Names in bold disclose their portfolio holdings in full

Source: Morningstar Direct 

Bunkall also makes the point that if even countries like Malaysia and New Zealand are able to force fund managers to play a straight bat with their investors, surely Australia can.
He notes his home country of New Zealand has a thriving small-cap universe of funds that aren't going bankrupt, despite the fact they disclose their holdings twice a year.

And a study from Massey University of Auckland examining the performance of local mutual funds both before 2015, when the current rules were introduced, and after, shows no material impact.

"I think people get bogged down in the detail of it. The industry throws so much complexity as to why you can't do it at regulators and working groups, that nothing happens," Bunkall says.

But several Australian fund managers have been cooperating with Morningstar in disclosing their entire fund holdings via our Direct platform for several years. Among Australian equity managers, these include Fidelity, Franklin Templeton, Nikko Asset Management, Schroders and T. Rowe Price.

Global equity funds from some of these managers and the likes of Aberdeen Standard, MFS and Vanguard are also among Australian managers to wholly-disclose their asset holdings to investors.

is senior editor for Morningstar Australia

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