As we approach the festive season and look forward to spending time in the company of family and friends, the events caused by the eruption of Whakaari (White Island) seem all the more tragic. For those people caught up in this event, what should have been an interesting and exciting end to 2019 has ended in suffering and grief. To me it is a salient reminder that in life we run risks all the time. Sometimes we take these risks knowingly and at other times we do this through ignorance. The reality is that when we don’t experience a negative consequence personally we can easily become complacent; we end up discounting the true risk that we are taking. I was recently talking with a client who works as a chemical engineer in petroleum exploration. He was explaining that in their industry there are some potential outcomes that are so horrendous, that merely reducing their probability is not enough. The goal has to be the practical elimination of those risks. As an adviser, I encou...

Source of data Speed and a lack of friction costs are essential for an efficient market. Since its inception in 2010 (two years after KiwiSaver was launched) the number of members in the NZ Funds KiwiSaver Scheme has grown year on year for nine years. As our scheme has never sought default status and never acquired another scheme, the growth has been entirely organic. New members have primarily joined by switching from other providers. In total, NZ Funds has attracted 6,880 members and lost 1,520 members – small in comparison to default funds – but big enough to gather information on over 1,000 switches to the NZ Funds KiwiSaver Scheme in the last 30 months. After scrubbing this data for errors, outliers and PIE tax rebates, we discovered the KiwiSaver industry can be divided into two types of managers: efficient operators, and those who appear to be gaming the system. The efficient operators Despite being criticised by the FMA in 2014 for poor sales practices when it come...

The Global Financial Crisis was so dramatic that it still looms large in the minds of many investors, almost as if it had only just happened. Anecdotally, there are investors with their money still waiting in the bank for a sign that the world is a safe place and that they can invest more widely. But while they have been waiting the Dow Jones Industrial Average in the United States, as an example, has grown around 300% since February 2007. More if dividends were reinvested. The 1987 share market crash had a similar impact on the psyche of New Zealanders. 30 years later it still comes up occasionally in meetings as a reason not to invest in shares. And yet the market has gone up by as much as 1,000% since. And the GFC has been added as a new reason – despite the NZX having returned approximately 350% since February 2009. Fear can be good. It's designed to keep us safe. We don’t even have to have direct experience - the stories of others can also affect us. And so it is with mar...

How socially responsible is your KiwiSaver manager? Advisers who have been in business for a decade or more will be aware of the power of fads, or as they’re commonly marketed in finance: investment themes. Investment themes are powerful because they can be packaged into a product and used to raise capital. In the early 90s it was Pacific Basin funds, then emerging markets, followed quickly by technology in the 2000s and more recently, highly cyclical commodities such as gold, water, forestry, milk - and avocados of all things. Some managers appear to have approached socially responsible investing in the same way, by treating it as a fad with which to raise capital. This is a mistake. Millennials get the most attention for values-based investing, but there is growing interest from the older and much wealthier Generation X. In 2018 NZ Funds surveyed New Zealanders to see what mattered most to them when investing. ESG (environmental, social and governance) rated first, ahead ...

Time is money. So said Benjamin Franklin in 1748 in an essay titled Advice to a Young Tradesman 1 . And while he was not alluding to retirement savings his quote is directly applicable. Visually I was reminded of this in contemplating a tape measure this week. Take the tape measure in both hands. Your left hand will be at zero and put your right hand, let’s say, at 90 centimetres. This, we will assume, is the span of your life. Move your right hand back to 65. The age at which you will probably retire, give or take. And very likely you will cease to earn a wage from that point. So, nearly 40% of the tape is now unavailable for saving. That percentage made an impression on me. What you have saved to that point plus National Superannuation is what you’ve got to fund the remainder of your lifetime. Now move your left hand to the number which is your age right now. From a retirement savings perspective a good start is if there is still a gap between your hands. But it will be clear...

Receiving an inheritance or selling a business can be a great financial opportunity. But it can come with challenges. There is an old adage, 'shirtsleeves to shirtsleeves in three generations', meaning that wealth gained in one generation will be lost by the third. Why? Simply because those who receive it are often ill-prepared to make good decisions about it. Equally this problem can apply to high income earners. A 2009 report from Sports Illustrated 1 found 78% of retired NFL players in the US had gone bankrupt or were under financial duress within two years of retirement. So, what if you do find yourself in receipt of sudden money – large or small? There can be no hard and fast rules. We are all different – our ages, whether we have mortgages, our job situations. But we should all want to first of all draw breath and take a moment. Decisions don’t have to be made immediately. Allow yourself time to let your newly received money and the options you have with it to se...

Most advisers know that around 90% of the variation in a KiwiSaver member’s returns are due to asset allocation and that younger investors should have a greater exposure to growth assets than older investors. They also know that KiwiSaver is a scale game, as member balances are too low to adequately compensate financial advisers for providing much more than a cursory financial overview. It is therefore logical that the legislation is supportive of lower cost robo alternatives and that the Ministry of Business, Innovation and Employment (MBIE) and the Treasury have announced they will be considering making the default option a life-stages approach. NZ Funds recently commissioned independent experts MyFiduciary to review the life-stages options available in New Zealand. Here are some selected insights from their report. Life-stages managers Nine out of 22 managers offer a life-stages option. Of these, four managers – AMP, ANZ, Generate and Lifestages – change allocations infrequ...

With New Zealand interest rates at their lowest level in 50 years I am seeing an increasing number of retired clients who are looking for better returns than are available from bank term deposits. This can be a challenging time for these clients as, for many of them, it is the first time they have considered investments beyond term deposits. Within the financial industry there is an acronym, TINA, which stands for 'there is no alternative'. The acronym recognises that for a group of clients there is no alternative but to diversify beyond fixed interest investments alone. The stark reality is that if they continue to limit their investments to fixed interest alone, it is likely that they will exhaust their retirement capital prematurely. For others the situation is more finely balanced. It could well be that because of the level of capital they have, or their modest annual drawings, that being invested in fixed interest alone may still allow them to meet their objectives. ...

NZ Funds is built around the core belief that comprehensive financial advice adds more value than it costs, so that individuals and families will be better off over time if they work with a financial adviser. In a comparatively short period of time, NZ Funds has become one of the largest privately-owned and operated wealth management organisations in New Zealand.   Over the last thirty years, NZ Funds has managed direct investments which come from the public and indirect investments which come through financial advisers. Based on funds flow during critical points in time, it has been our experience that clients who work with financial advisers make better financial decisions... Please read the full report below.

At $55 billion, KiwiSaver is about the size of a third of all shares listed on the NZX. That is big enough to hide a multitude of 'assets'. Like the dark web, you need to dig deeper than the Fund Updates and use forensic expertise to decipher what funds hold, but if you look, this is what you will find. Each KiwiSaver manager is required to calculate an asset liquidity ratio quarterly. The main test of whether an asset is liquid is whether it can be sold in 10 working days at close to its stated value. Illiquid assets are any investment that cannot be sold within that period and private assets, such as unlisted property or private equity. Based on our analysis, as at March 2019 Fisher Funds Two KiwiSaver Growth Fund was an investor in unlisted property, holding 6.62% or $27.8 million. The problem with unlisted property is that there is no arm’s length daily price at which investors can transact. Investors entering and exiting funds which hold illiquid assets are therefor...

The old saying “a little knowledge is a dangerous thing” applies to most things in life, but particularly so when it comes to investment matters. I am intrigued to see that one KiwiSaver provider is currently running a promotional campaign to “Wake up your KiwiSaver”. The promotion rightly highlights the critical importance of the asset allocation decision (i.e. how much of your fund is allocated to growth assets, such as shares) on your likely capital balance at retirement. This point is particularly relevant for those who did not actively select a KiwiSaver fund when they joined and were allocated a Default Fund. Under the current rules the Default providers must hold the majority of their investments in cash and fixed interest. One concern that I do have about this call to action, is that any increased exposure to shares will increase the probability that a KiwiSaver member will experience a short-term loss. It has been shown that 1 , on average, investors are twice as fearful ...

What will share markets return in the next 6 months? What about 12 months? They’ve been largely going up for some years now. Can that continue? Personally, I don’t know. Does anyone, really? There are some risks. But there often are. And markets carry on upward anyway. And conversely there can be something unexpected that triggers them to fall. Followed by the task of predicting how deep the fall will be and how long it will last. And then the steps forward and back with no clear direction as markets seek to recover. But, over the longer term the market advances. Research suggests that simply taking a longer-term view, being well diversified and staying invested is more profitable that trying to time one’s way in and out of markets. Some people believe that the future of investment markets can be seen with accuracy. Perhaps they just want to believe. Or they get paid to believe. But in reality, consistent, accurate prediction is impossible. The world is just too complex. Conside...

In last month’s column, I discussed the impact that falling markets can have on those clients who are in the saving phase of their lives. I concluded, somewhat surprisingly, that for clients who are disciplined and invest in a certain way, negative markets can help build wealth. Although this conclusion is valid for half of the population (i.e. those in the wealth accumulation phase of their lives), what about those clients who are retired and looking to receive a sustainable level of drawings to help fund their living costs? The simple answer is that for retired people, a falling market environment has to be endured rather than benefited from. It is a time when the way a portfolio is ‘engineered’ will become a critical determinant of whether the strategy will be able to sustain the same level of drawings when markets turn negative. Don’t cut down half-grown trees. For retired clients, the way in which the portfolio is constructed has a lot in common with a diversified farming...

NZ Funds offers a free comprehensive UK pension transfer service that helps clients every step of the way until their pension is re-located to New Zealand. NZ Funds began offering a transfer service in 2017 when our Qualified Recognised Overseas Pension Scheme was registered with Her Majesty’s Revenue & Customs. Since then we have transferred over $30 million of UK pensions. Below are our top tips for those considering whether to transfer their pension from the UK to New Zealand. Can my pension be transferred? Generally, most pensions are transferable, irrespective of the amount. However, there are a few exceptions to this. If you do not fall into one of the following categories your pension should be transferable! The UK State Pension, which is the equivalent of New Zealand’s NZ Super – paid for by the Governments of both countries – is not available for transfer. However, if you have relocated to New Zealand you may be eligible to receive NZ Super payments. Some rul...

Foreign currency movements have again been in the news with the United States Treasury labelling China a currency manipulator. These movements can also have an impact on clients’ KiwiSaver returns. This is dependent on how a Scheme’s manager treats the foreign currency exposure they get when purchasing international assets. To understand how different KiwiSaver Schemes manage foreign currency within their international share exposure, we reviewed 77 KiwiSaver funds which have an international share exposure of greater than 40%. Information on these funds was sourced from their Fund Updates and their Statement of Investment Policy and Objectives (SIPO). KiwiSaver Scheme managers treat foreign currency exposure in one of four ways. First, they can do nothing and when they purchase international assets, just hold those assets in foreign currency until they are sold. This is what the industry refers to as unhedged international assets. The downside of this approach is evident. If ...