NZX CEO Tim Bennett on a mission to get Kiwis to check out exchange traded funds

The NZX’s chief executive Tim Bennett sees a definite prospect to provide Kiwis a cheaper option and a broader range of products in exchange traded funds (ETFs) with its acquisition of one of the largest passive funds in New Zealand, SuperLife.

The $20-million purchase will be paid for partly through the issue of $10 million of bank debt and issuance of $10 million of NZX shares to the vendors, which are subject to disposal restrictions. A further payment of up to $15 million are based on retention and growth of the funds under management over a three-year period. These further payments, if targets are achieved, will be $5 million of NZX shares and up to $10 million in cash.

SuperLife has more than $1.27 billion of funds under management, making it one of the largest specialist financial services providers of superannuation, KiwiSaver and managed investment products. Together with the NZX’s $380 million managed through Smartshares, the combined total funds under its ambit would make the NZX among the country’s top 10 funds, Bennett says. KiwiSaver's assets stood at over $22 billion as at June 14, according to official statistics.

Room for NZ ETFs to grow

New Zealand certainly has room to grow its share of ETFs given the local fund management industry is forecast to grow by 15% every year over the next 20 years, Bennett says.

“When we look globally, particularly in the Australian market, we see ETFs have been increasing their share of the fund management sector, higher than the other market share.”

ETFs in Australia has grown, from four in 2004, to 91 with AUD$14 billion under management. “Over the last four months, the growth has been 21% in Australia (for ETFs). The market likes ETFs because it provides low cost entry for index (based) returns,” he says.

The NZX’s own ETFs,have seen a 12.3% growth this year and there is definitely room to grow that further, he adds. Currently apart from the NZX’s five ETFs, there are no other local ones available to investors. NZX introduced the first ETF in 1996. The management fees listed for five of its funds range between 0.60 and 0.75%.

US$2.2 trillion in global ETF assets

Around the world, assets under ETFs totalled US$2.2 trillion in 201,3 invested across 5,000 ETFs around the world, according to PwC. An Ernst and Young report echo the findings, noting that at the end of October 2013, the Global ETF/ETP industry had 5,042 ETFs, with 10,053 listings, offered by 215 providers on 58 exchanges.

Globally, the debate remains whether passive funds best serve investors, or actively managed funds. ETFs are passive, meaning the assets under management mostly mirror the composite of the companies making up the index of any exchange. The cost differential between passive funds and actively managed funds varies, but in New Zealand, it could be up to 1%, depending on the asset class, and how actively they are managed, and by whom, among others.

Performance

Bennett says while a certain proportion of funds have outperformed the stock market index, only some have consistently outperformed the index while many under performed the index.

The local ETF market has been hampered somewhat by a lack of options, he says, adding NZX would be looking to change that with SuperLife’s acquisition.

The NZX plans to manage the combined funds management business separately from its capital markets business. A search for a CEO for the combined business is now underway. As part of the acquisition, SuperLife’s directors, Michael Chamberlain and Owen Nash will continue on as directors of SuperLife, and Chamberlain will join NZX’s management team.

Brian Gaynor, executive director of Milford Asset Management, a fund management company which is also a shareholder of the NZX, told Idealog he is disappointed with the level of disclosure on the price paid for SuperLife.

“Given that it is an announcement of an acquisition by the exchange, we would have expected a higher level of disclosure. With the information given, it is hard to make sense of the transaction, particularly the price."

He adds the exchange hasn’t broken any rules but given that it is driving for higher levels of disclosure, it has put itself in a position under the benchmark it has set for others.

NZX says it will provide a full update on the acquisition and future growth plans at NZX’s full year results announcement in February 2015.