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Review of the KiwiSaver Fund Manager Market Dynamics and Allocation of Assets

Appendix 4: KiwiSaver provider profitability

The aim of this analysis is to examine the profitability of the six largest providers in terms of AUM. This was done using two conventional ratios, net profit margin and return on assets (ROA). These were chosen due to their simplicity and wide spread acceptance. In addition, ROA was chosen over return on equity as it better captures the economic capital that has been invested and the return it is generating, and it is independent of the capital structure of the providers - many of which are wholly-owned subsidiaries.

It is important to note that we produced net profit margin and ROA ratios using the respective KiwiSaver providers' asset manager annual report data. This raises some possible deficiencies in the data we have analysed as it is not always possible to accurately attribute the profits identified directly to the particular asset manager's KiwiSaver business unit or whether the profits are from other lines of business within the asset manager. Only one provider - ASB - separates its different asset management revenue streams to reveal that 67% of the fee revenue received by ASB Groups investment limited is attributable to KiwiSaver.[84] That same share of revenue may not be replicated among all six providers analysed. Additionally, it is not possible to compare all asset managers due to differences in size and revenue streams. As a result, the ratios we have produced below may not be a fair comparison and are indicative only. A final issue is that this analysis is static in the sense that it only examines the most recent annual report, and thus it may not represent the true profitability of these firms over time.

Despite all of these limitations, the analysis is the best possible with publicly available data and is still useful as a proxy to gauge the profitability levels of the wider funds management market, which KiwiSaver undoubtedly plays a growing role in. We intend to test these findings directly with fund managers in interviews and these were not disputed.

The profitability study was completed in two stages, firstly comparing the top six KiwiSaver providers to international and domestic firms. Secondly, we compared the average profitability of the top six providers with a selection of the rest of the market.

The first stage of the analysis looks at the profitability of the top six KiwiSaver providers in comparison to international and local firms. They are included to put the KiwiSaver providers into context; these are shown in green on the graphs. Blackrock has been chosen as it is the world largest asset manager; Aberdeen as it is a moderate size asset manager, with a specialist pension arm; and IOOF as it is a comparable Australian firm. Harbour Asset Management was also chosen as it is a small local New Zealand Asset management company so it provides some domestic context.

Methodology

The ratios were constructed using data from the KiwiSaver providers' latest asset manager annual report.

Net profit margin was calculated based on the following the calculation:

  • Net profit margin= Net profit after taxation/total operating income

ROA was calculated based on the following equation:

  • ROA= Net profit after taxation/total assets[85]

Results - Profitability Study of the six largest providers

Below is a summary table of the results for the first stage of our profitability study:

Overall, there is a lot of variance in the net profit margins of the six firms examined. ANZ, Fisher and Westpac all appear to have very high profit ratios in excess of 25% while AMP, ASB and Mercer had a much lower ratio of around 7%. On closer inspection, it may be that high costs are a reason for lower ratios for AMP, ASB and Mercer. For example, ASB spent six times as much on distribution expenses year on year than the year previous.

ROA appears to be less variable among all six firms reviewed. Our analysis suggests that New Zealand's KiwiSaver managers are not as profitable on average as selected large asset managers in other jurisdictions. Although the large international asset managers Blackrock and Aberdeen in the UK have a higher average net profit margin, three of the largest six KiwiSaver providers have similar net profit margins. In addition, nearly all of the top six had a higher return on assets than the comparative firms listed.

Results - Profitability of default providers vs rest of the market

Below is a summary table of the results for the second stage of our profitability study:

There are varying levels of profitability in the rest of the market once the nine default providers have been excluded. It is important to note that these firms are a lot smaller in terms of AUM and membership levels. However, providers such as Milford, Smartshares and Craigs Investment Partners have all found ways to be profitable. These providers appear to take a niche approach and thus may be capturing customers and funds under management which the larger default providers are missing. This also illustrates that there is an element of contestability in the market, despite the market being moderately concentrated.

Notes

  • [84]ASB Group Investments Annual Report 2013.
  • [85]Note total assets is not total AUM, rather total assets in this equation refers to the figure listed on the company’s statement of financial position. This figure includes things such as cash and securities not held on behalf of clients, available for sale securities, property and plant equipment and goodwill.
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