NZ Fund Managers

[Muse]

Yes I made a typo on the net profit figure. Now corrected.



I have added Milford to my comparison table as well. I see in the 'Milford Limited' accounts, in the income statement, that there was a fee of $136.594m paid to the parent Milford Asset Management company (the fee you pointed out FM). You would have to assume that all the cost allocations are done in accord with the parent company's wishes. So if the parent were to decrease the fee required to be paid (and I do note this management services fee jumped an astonishing by $59.010m from FY2020 to FY2021), then the declared profit of 'Milford Limited' can be whatever Milford management want it be (within reason). I guess net net profit margin of 7.21% is there to appease the kiwisaver scheme overseers, so Milford don't look too greedy?

SNOOPY

aye

Milford Asset Management Ltd - topco - is the equivalent to Fisher Funds Management Limited - they are both the top entity and reflect the full consolidated view. Ideally we'd be comparing like for like. We have topco financials for fisher, not for milford, the later we just have a subsidiary. A subsidiary that probably generates the vast majority of its income. and probably its expenses. but we don't know what in milford topco. its possible the charges are just for IP and all the bums on seats and technology is in MFL, and the management fee is a simple profit minimisation tool for PR purposes (thats what I expect). possible the consolidated group looks a whole like MFL npat adding back the after tax intercompany fees. but just speculation.

what do the npat figures % of revenue for milford funds ltd look like if you do that? probably look weird

[Muse]

sorry last contribute to your analysis snoopy. I'm getting a bit long in the tooth on all this but if i recall correctly only fisher funds and milford seek to charge performance fees amongst the kiwisaver providers. They will pay some proportion of that to staff and the management company keeps the balance - split unknown.

last time i looked into this there were quite a few industry sources you could look at if you wanted to delve deeper into FUM and returns

fundsource
morningstar do some industry research
the fma
and canstar in australia

cheers.

[Snoopy]

Milford Asset Management Ltd - topco - is the equivalent to Fisher Funds Management Limited - they are both the top entity and reflect the full consolidated view. Ideally we'd be comparing like for like. We have topco financials for fisher, not for milford, the later we just have a subsidiary. A subsidiary that probably generates the vast majority of its income. and probably its expenses. but we don't know what in milford topco. its possible the charges are just for IP and all the bums on seats and technology is in MFL,

According to this link https://www.dnb.com/business-directo...185d55a1e.html, Milford Funds Limited has 13 employees and generates $US119.39m in sales whereas Milford Asset Management Limited https://www.dnb.com/business-directo...9eda2ee61.html has 210 employees and generates $US11.59m in sales.

Since I have already figured out Milford's 'investment team' contains 33 people (post 2 in this thread), it would be odd to have close to half of that investment management team inside 'Milford Funds Limited' with the others inside 'Milford Asset Management Limited'. So I would guess that those 13 'Milford Funds Limited' employees are more likely clerical positions 'booking sales' by keeping note of investment funds as they roll in, while all the actual investing expertise is outsourced to the parent 'Milford Asset Management'.

and the management fee is a simple profit minimisation tool for PR purposes (thats what I expect). possible the consolidated group looks a whole like MFL npat adding back the after tax intercompany fees. but just speculation.

what do the npat figures % of revenue for milford funds ltd look like if you do that? probably look weird

Putting some numbers on your speculation:

1/ The 'Management Services Fee' for 'Milford Funds Limited' amounted to $136.594m.
2/ If MFL had not paid this fee and booked this cashflow as profit, then they would have had to pay tax on it, leaving the amount to be added to profit as: 0.72( $136.594) = $98.348m.
3/ This would have increased MFL NPAT to $11.725m + $98.348m = $110.073m.
4/ This implies a 'net profit margin' of $110.073m/$162.710m = 68% (!)

That figure makes the net profit margin salted away by the Fisher team sound 'fundholder friendly'. However, given the future profitability of MAL is not determined by clerical staff and cleaners, I am picking this 68% figure overstates the true profitability of Milford managed funds, as an operation.

SNOOPY

[Snoopy]

There is a price to pay for 'excitement'.

	Share Price 28-04-2022	PE ratio	Price Change 01-012022 to 28-04-2022
Microsoft	$282.33	30.13	-15.4%
Alphabet	$2,285.89	20.37	-21.2%
Apple	$156.57	25.99	-14.0%

These are big hits for three of the four largest investments in the Milford Global Equity Fund, representing 12.27% of the fund. as at 31-03-2021. Although I do note that the whole NASDAQ index is down 21.12% from the start of the year. I don't follow any of these shares. But those PE ratios are historical, and forward forecast PEs are likely higher. So I don't see Microsoft, Alphabet or Apple as 'cheap' - even now.

Annual return to 31-03-2022 was 5.66% after fees and taxes, down from 24.14% just 3 months earlier! Clearly the first quarter has been unkind to Milford Global Equities! Rising interest rates can deal a double blow to growth stocks, firstly due to a present day reduction of earnings, and secondly due to a rising discount rate affecting the present value of future earnings.

The fund rocketed by 37.36% over YE31-03-2021, against a long term average growth rate of 10.88% p.a.. So I don't think it is out of line to say that a correction is overdue. But is the correction finished?

A weeks or so on, and how is the correction at Milford going?

	Share Price 05-05-2022	PE ratio	Price Change 01-012022 to 05-05-2022
Microsoft	$277.35	28.93	-17.15%
Alphabet	$2,330.11	21.07	-19.65%
Apple	$156.77	25.48	-13.87%

Is this what they call a double bottom?

SNOOPY

[Snoopy]

This one is a bit more a 'boutique manager', although they do have a shareholder called Jardens (77.57% owned by them in fact). Share funds available for investment are as follows:

1/ Harbour Australasian Equity Fund:

Investment Theme	The Fund is actively managed and invests in stocks which our equity team believes will outperform the local equity market over the long term. Stocks are chosen through a combination of qualitative bottom-up company research undertaken by our in-house analysts, environmental, social and governance (ESG) integration and quantitative screening of factors such as growth and quality.
Currency Hedging Policy	ASX component 90%-95% hedged to the NZD
Top ten holdings	MFT, FPH, EBO, CEN, MEL, SUM, PEB, IFT, CSL Limited Australia (drug maker), and AIA. The top ten positions make up 55.8% of the fund. The fund currently has 29.3% of assets invested in Australian equities.
Distribution over FY2022:	none.
Total management annual charge	= 1.1% (plus a performance fee of 0%).
Fund size	$248.6m @31-03-2022.
Fund risk rating	5

2/ Harbour Australasian Equity Focus Fund:

Investment Theme	The Focus Fund is actively managed and only invests in stocks which are rated highly by our in-house research analysts. The team use their in depth company and industry research to rate and pick stocks which they strongly believe will add positively to the Fund.
Top ten holdings:	MFT, Macquarie Group Limited Australia (investment banking), EBO, CSL Limited Australia (drug maker), BHP Group, Australia (Mining), SUM, PEB, Xero Limited (Accounting Software), Goodman Group Australia (logistics management and development), Vulcan Steel Limited Australia. The top 10 investments make up 62.9% of the funds value. The fund currently has 54.56% of assets invested in Australian Equities.
Currency Hedging Policy	ASX component 90%-95% hedged to the NZD
Distribution over FY2022:	none.
Total management annual charge	= 1.70% (which includes a 0.53% performance fee).
Fund size	$35.2m @31-03-2022.
Fund risk rating	6

3/ Harbour NZ Shares Index fund:

Investment Theme	Track the NZX50 Portfolio Index. This index contains the top 50 companies listed on the NZX, but with a 5% cap on each company.
Top ten holdings	AIA, EBO, MFT, FBU, IFT, CEN, MEL, SPK, FPH and ATM. These holdings make up 48.9% of the fund.
Distribution over FY2022	2.28cpu (based on a unit price @05-05-2022 of 2.013 and a 28% tax rate, this is a gross yield of 1.39%)
Total management annual charge	= 0.2%
Fund Size	$382.4m @31-03-2022.
Fund risk rating	5.

4/ Harbour Sustainable NZ Shares Fund:

Investment Theme	Tracks NZX50 index, but excludes companies that are exposed to large carbon emitters, alcohol, gambling, munitions, adult entertainment, nuclear armaments, firearms, tobacco and recreational cannabis, child labour and companies with human and animal right violations. There will also be positive and negative tilts to the remaining companies based on Harbour’s proprietary Corporate Behaviour Score, which has been a core part of Harbour's equity investment processes for over a decade.
Top ten holdings	AIA, MFT, CEN, EBO, MEL, SPK, FPH, FBU, IFT, ATM, making up 54.1% of the asset value of the fund.
Distribution over FY2022:	0.72cpu (based on a unit price of 0.9251@05-05-2022 and a tax rate of 28%, this is a gross yield of 1.08%)
Total management annual charge	= 0.25%
Fund Size	$186.0m @31-03-2022
Fund risk rating	5

5/ Harbour Real Estate Investment Fund:

Invrestment Themes	As well as holding listed Property Sector funds, the Fund may also hold securities which are not included in listed property security or Real Estate Investment Trusts (REITS) benchmark indices. To be included, underlying profit certainty needs to be high. Examples include property management, sea ports, toll roads, airports, cell-phone towers, aged care & retirement villages, waste management facilities and data centres industries.
Top ten holdings	GMT, PCT, KPG, VHP, PFI, ARG, SPG, IPL, Goodman Group (Australia) (this company owns develops and manages logistic building spaces) , Charter Hall Group Australia (invests and develops office, retail, industrial & logistics and social infrastructure). These top ten businesses make up 76.9% of the asset value of the fund.
Distribution over FY2022	2.01cpu (based on a unit price of 1.2476 and a tax rate of 28%, this is a gross yield of 2.24%)
Total management annual charge	= 0.88%
Fund Size	$110.4m @31-03-2022
Fund risk rating	5

Note that I have omitted from this list the 'Harbour T Rowe' funds, that are repackaged funds from other providers. I have also excluded funds that have a non-share component.

The 'Investment Team' made up of 'Equities', 'Fixed Income' and 'Multi Asset' managers number 17 people.

SNOOPY

[Snoopy]

3/ 'Trans-tasman Equity Fund'

Investment Theme	Stock picking across the NZX and the ASX
Distribution over FY2022	3.0cpu

It looks like the above is the only Milford run 'purely share based' fund that offers an income payment during the year. Looking up distributions in the FAQ lead me to this curious text:

---------------

Milford Asset Management - How Do Distributions Work?

Some of our funds pay distributions at set intervals. Distributions are a way for some of the fund’s returns to be paid out to investors, in the form of cash payments. The portfolio managers have set the distribution amounts at levels they feel are sustainable, given the current and expected future environment. The amount paid to each investor is based on the number of cents per unit held.

If you are investing into a fund that pays regular distributions but opt not to receive the cash, it will instead be reinvested and used to purchase additional units in that fund.

Distributions from the funds are non-taxable events and are not treated as income for tax purposes.

------------------

It is the last bit that I have put in italics that intrigues me. How on earth can that be?

SNOOPY

[777]

PIE income is not treated as income for tax purposes so maybe that explains it. Only a guess on my part.

[Snoopy]

Milford Asset Management - How Do Distributions Work?

Distributions from the funds are non-taxable events and are not treated as income for tax purposes.

How on earth can that be?

PIE income is not treated as income for tax purposes so maybe that explains it. Only a guess on my part.

Your answer makes sense 777. But the Milford wording goes further than that in my view, suggesting such income is 'a non-taxable event'. As I understand it, PIE entities still have to pay tax. It is just that PIE unitholders, provided the PIE tax is deducted at the appropriate rate, have no further tax obligation. So by my thinking, describing distributions as a 'non taxable event' has muddied your -on the surface- reasonable explanation.

I even went back to my IR3 tax return from 2021 and looked at question 36

"Did you receive any PIE income?"

I then asked myself, why it was that I would be asked about a 'non taxable event' in my income tax form? That doesn't make sense in the context of your answer.

SNOOPY

[Snoopy]

Snoopy,
is this KIWI WEALTH LIMITED (1738361) ?

NPAT $11.916m (page 9) / Fees $51.908m (page 15) = 23%

https://app.companiesoffice.govt.nz/...4E226E1FFDC7AA

(Perhaps I'm confused about this; parent is NEW ZEALAND POST LIMITED (315766) financial statements p13: Kiwi Group Holdings intermediary, but KIWI WEALTH LIMITED (1738361) was previously
GARETH MORGAN KIWISAVER LIMITED (from 28 Mar 2006 to 01 Apr 2014)
GARETH MORGAN INVESTMENTS KIWISAVER LIMITED (from 17 Mar 2006 to 28 Mar 2006)
INFOMETRICS KIWISAVER LIMITED (from 24 Jan 2006 to 17 Mar 2006)

Last updated on 27 Oct 2021)

Haumi (welcome the forum BTW), I spent a lot of time poking around that NZ companies office website to get the annual accounts of Kiwi Wealth, with no success. Yet somehow you have managed it. THANK YOU! There is no confusion. That is exactly the information that I am after. You are a champion. I have now gone back to my net profit margin comparison table (post 16) and put your figures in to finish it off.

Your information has uncovered something mildly annoying in the respective accounts though. There are two perspectives on what is going on here. There are the managed funds themselves that are paying the management fees (balance date 31st March 2021):

https://www.kiwiwealth.co.nz/assets/...ments-2021.pdf

Then there is the management company 'Kiwi Wealth' that is receiving the management fees (balance date 30th June 2021)

https://app.companiesoffice.govt.nz/...4E226E1FFDC7AA

As you can see the balance dates from both sides don't match. I am guessing this is because the funds wish to tie in their balance date with the unit holders individual tax return date (normally 31st March). Meanwhile Kiwi Wealth are tied in with the balance date of Kiwibank, which is 30th June.. Nevertheless it doesn't make it easy when you are looking through the two way mirror glass both ways. Case in point being the the revenue item 'Customer and Client Fees'.

If we look in Kiwi Wealth Annual Report 2021 on p2 this figure is $51.908m. If we look at the Kiwi Wealth Managed Funds Annual Report 2021 on page 3, the listed management expenses paid include $117.546m for the Conservative Fund, $257.838m for the Balanced Fund and $218.214m. Adding those three totals up, I get $593.598m, which is more than ten times the figure in the Kiwi Wealth books. Even with the balance date mismatch, something is not adding up here.

Going to explanatory Note 8 in the Managed Fund accounts we get the following information on fees,

"Kiwi Wealth Limited is the manager of Kiwi Wealth managed funds. In accordance with the trust deed, management fees are calculated based on the net asset values of the Funds that are calculated weekly and paid monthly. Management fees are a related party expense paid to Kiwi Wealth Limited, and are shown in the statements of Comprehensive Income under 'Management fees'."

This confirms I am comparing apples with apples.

A thought occurred to me that maybe the Kiwi Wealth accounts referred to only the much smaller managed fund side of the business, and the Kiwisaver fees were accounted for elsewhere in a separate company structure. However, if I look under note 4 in the Kiwi Wealth accounts, that shows two separate management fee entries for 'KS' (Kiwisaver) and 'MF' (Managed Fund) accounts. So it appears this is not the explanation.

Anyone else got a theory to explain this 10:1 fee mismatch?

SNOOPY

[Snoopy]

I like to try and get a flavour of how the asset mangers think. The following information from this 8th April 2022 round up.

https://www.harbourasset.co.nz/resea...ds-down-under/

1/ Harbour consider that global efforts to control inflation will be successful.
2/ In 'equity growth' Harbour are overweight in 'healthcare' and 'information technology' sectors, as these sectors look 'relatively more attractive'.
3/ Harbour thinking is that during periods of low growth coming up, it may be prudent to move away from cyclical stocks as economic activity decreases. NZ interest rates have risen faster than most. With the markets being forward looking -coupled with decreasing economic activity- that means higher interest rates, and the accompanying discounting effect on future earnings may have already done their damage on growth stock valuations.
4/ Nevertheless Harbour has made selective investments in cyclical investments with 'pricing power': The materials and financial sectors. Disruption in the global supply chain is expected to favour more locally sourced solutions on an ongoing basis.
5/ Harbour are underweight in the energy sector, where risk of disruption is high.
6/ Harbour are underweight in communications, real estate, infrastructure and utilities sectors where valuations are high relative to potential growth.
7/ Harbour has sold out of US financial sector after booking some good interest rate related gains
8/ Harbour thinks that the Australia and New Zealand region has better near term outlook than other global equity markets.

SNOOPY