Commentator – Ruari McGregor, Director & Chief Operating Officer

Q: What are the dangers for consumers in investing in products that don’t have arm’s length custody arrangements?
A: The definition of custody is “protection, care or guardianship of someone or something.”  In the managed funds world this relates to safeguarding the underlying shares, bonds and other securities held within each managed fund independently of the fund manager. In New Zealand,  Custodians are required to have an assurance engagement with a qualified auditor every year.

All Harbour Investment Funds are established under a trust deed.  Under the deed, Harbour appoints an independent supervisor for the Harbour Investment Funds.  The supervisor must be licensed by the Financial Markets Authority under the Financial Markets Supervisors Act 2011. The supervisor can appoint an independent custodian to hold underlying securities, however they cannot delegate away their obligations.

This structure means the assets of each Harbour Investment Fund are independently safeguarded at arms-length from the fund manager and provides comfort that if the fund manager, supervisor or custodian gets into difficulty, the assets are safeguarded. It provides reassurance to the investor in the managed fund that the fund’s assets will be protected if either the fund manager, supervisor or custodian ceases to operate.

Q:How can investors make sure the products they use have an independent custodian?
A: Investors can first check that the Fund Manager is licensed by the FMA at https://www.fma.govt.nz/compliance/licensed-providers/

Then investors should read a fund manager’s investment offer documents, which are available usually via the fund manager’s website or on request. The specific documents to review are the Product Disclosure Statement (PDS) and Other Material Information (OMI). These documents show who the custodian is, and investors can further check the custodian’s ownership at the New Zealand Companies Register at www.business.govt.nz/companies.

We also encourage investors to contact fund managers directly and ask them about their specific custodial relationships.

Q: Do you think all custodians should have to be licensed and meet similar professional standards?
A: The custodian provides an integral safeguard for investors within a managed fund structure, so we believe they should be licensed and monitored to uphold the highest possible standards in New Zealand.  This would further improve confidence within the New Zealand investment system, which will be of benefit to all investors.
As custodians are required to provide an annual external assurance report by a qualified auditor, this should also provide comfort to investors.