Financial services industry opts for secrecy and investors lose out – again: Editor's Note
Investors are entitled to know how their money is being invested, writes Emma Rapaport.
When I first started writing about investing in 2017, lots of things about the state of affairs for retail investors enraged me. Why do only wealthy people get access to financial advice? How is brokerage so expensive? Why do I need $20k to start investing in a managed fund? How did we possibly get to the stage where investors are paying for multiple insurance products?
I've come to understand there's nuance behind why things are the way they are (in some instances). It's easy to be indignant when you're ignorant. But if there's one thing I'm happy to get on my soapbox about its portfolio holdings disclosure.
It is outrageous that Australian investors don't have the right to know how their money is invested. In this country investment managers – whether of superannuation or managed funds - aren't legally required to disclose what's in their portfolio to the public or their investors. The government compels every Australian worker to contribute to superannuation and yet doesn’t compel funds to be transparent about how it's invested.
Australia lags other developed markets on this issue. An annual study undertaken by Morningstar ranked Australia dead last out of 26 countries on managed funds disclosures. Investors in the United States, Canada, the United Kingdom can go on the websites of asset managers and see how their money is invested. In India, fixed income portfolios are updated every two weeks. While some Australian super funds have proactively increased transparency about their portfolio holdings in recent years, they are in the minority.
Country disclosure scorecard | Morningstar Global Investor Experience Report 2020
The arguments opposing disclosure from the asset management industry aren't persuasive. They complain about the administrative burden that would fall on them. But if 25 other markets around the world can work it out, I think we can too. Asset management is increasingly global. If the likes of PIMCO, Franklin Templeton and T. Rowe Price can disclose their portfolios in other markets, why not here? It's not like these funds don't know what they hold (if they don't that's a concern). Disclosure obligations were first moved by the government in 2009 (then deferred in 2014, 2015, 2016, 2017, 2019 and 2020). The industry has had over a decade to prepare.
MORE ON THIS TOPIC: Aussie funds keep investors in the dark
Super funds have also lobbied against disclosing the valuation of their unlisted assets, a feature of the draft disclosure regime, saying this could lower the sale prices of these assets and cause detriment to fund members. Personally, I'm less interested in valuation disclosure but why not just give a range or disclose on a delayed basis?
The benefits of disclosure are clear. Transparency gives people confidence in the system. Obscurity arouses suspicion. In the wake of the financial services royal commission, the industry needs to do everything it can to regain consumer trust.
Secrecy also leads to member disengagement and frustration, especially for those who want to avoid specific companies or promote sustainable or responsible practices. Without a mandated disclosure regime, across all asset classes, members can't have the confidence their fund is investing in line with their values or check on the validity of their claims. So much for "look under the hood" or "do your own research".
Finally, there's a question of risk. Without knowing what's inside portfolios, how can advisers and independent researchers identify problems before they occur and issue warnings? Take the Evergrande collapse in China as an example. My colleagues in other markets were able to quickly put together a paper showing which funds were exposed to the company's debt and warn about others with similarly large credit risks. Australian investors are never going to get that. We just don't know what funds are holding.
Last week, the federal government had the opportunity to draw a line in the sand, the opportunity to force funds to disclose their holdings. They blew it. In the final version of the Corporation Amendment (Portfolio Holdings Disclosure) Regulations 2021, proposed regulations to force super trustees to publish portfolio holdings were meaningfully weakened.
"What the government has settled on with this regulation is a watered-down asset-allocation requirement, not true portfolio holdings disclosure that is prevalent globally," Morningstar director of manager research Grant Kennaway wrote in his response to the legislation, noting the proposed standard only calls for a semi-annual disclosure and it doesn't cover managed funds.
"Where the government has landed means there is no way investors could use the now required data for portfolio comparison, nor is there a way you could use this data to understand the true risks of a portfolio."
What we need is meaningful improvement to the state of affairs. What has been agreed on does not exceed the lowest bar Morningstar sees in any disclosure regulations in other global markets. Put simply, this regulation is retrograde and does not serve Australian investors' best interests.
You can read Morningstar's full response to the legislation here.
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