I’ve been told many times how good interest rates were in the 1980’s. A 6 month term deposit attracted a 15% interest rate in 1986, rising to 18% the next year. However, before we get too nostalgic, we need to understand what the real return is. If, for example, I earn 5% but inflation is 2% then my real return is 3%. The reality of 1986 was high inflation and that, despite the 15% interest rate, investor dollars were going backwards in what they could buy, especially so once tax was deducted. The impact of inflation is to reduce my purchasing power. To earn a real return is to maintain and grow it. Skip forward to 2006 and the rate was 7%. Inflation however was only 2.6%. The interest rate was lower than 1986 but the real return significantly improved. Our dollars were holding their value and more. Today 1.5% is a more likely rate. Deduct tax and we will again be struggling to earn a real return. Equally concerning is the distinct possibility that interest rates will stay low

“ The way we make payments is changing faster than any other area of financial services. New technology and changing customer expectations are shattering the status quo and challenging the traditional role of banks. ” Interestingly, EY wrote this back in 2019, highlighting that the way we use technology and make payments was already changing rapidly. This is one of the many themes in the digital world where COVID-19 has brought three to four years of digitisation forward into a six month period. NZ Funds’ clients are invested in this once-in-a-generation digital transformation, and we believe the changes we are witnessing are permanent which allows us to look through any short-term market volatility. Source: FXC Intelligence Analysis, Company Financials, US Census Bureau. For more information please contact NZ Funds. The Tap. Touch. Speak. Grab and go PayPal, the payments company, recently reported record earnings as consumers and merchants rapidly embrace a shift towards

In the last year I have several times listened to trustees of charities debate their investment strategy. Arguably these discussions should be challenging as trustees grapple with their own investment histories and biases while feeling the responsibility of looking after funds that are not theirs. Unfortunately, the default position, rather than investigate and learn, often seemed to be “these are not my funds therefore I should take a conservative position and invest only in the bank”. Clearly taking on too much risk is inappropriate. But so is taking too conservative a position, such that losing purchasing power against inflation becomes a realistic threat or longer-term spending and capital outcomes are undermined. A key question therefore is “what is risk?” A reference guide for how trustees should think can be found in the Trustee Amendment Act 1988. Trustees are required to act with the prudence expected of someone managing another’s affairs rather than their own. They mu

In March 2018, we wrote that over the years we have kept our approach to new investment opportunities pretty simple. If, upon thorough analysis, a purchase offers both the opportunity of a return and safeguards against a total loss of capital, we will consider it as a candidate for investment. Therefore, in 2018 our answer to clients on would we invest in Bitcoin was No! Since then, a lot has changed within the cryptocurrency asset class. We have remained open-minded and curious and now we believe we are somewhere similar to the advent of the internet with digital assets and cryptocurrencies; that is, two to three years away from universal acclaim. Store of value Financial assets comprise the largest store of value in the world. The newest entrant is Bitcoin. A store of value is anything that holds its purchasing power in the future. It is a function of people’s perception of worth. Even tulips at one time were considered a store of value. Gold and oil have historically b

Although its origin is debated, the first use of the term ‘paradigm shift’ apparently occurred in the 1960s. A paradigm shift can be defined as ‘a major change in the concepts and practices of how something works or is accomplished’. I think that it is no exaggeration to describe the prospect of negative interest rates in New Zealand as a paradigm shift. For many it will require a rethink of their financial expectations and how they go about constructing a retirement portfolio. In response to the economic turmoil caused by COVID-19, the Reserve Bank of New Zealand (RBNZ) reduced the Official Cash Rate (OCR) to 0.25%. At that time, they commented that it will remain at this level for at least 12 months, suggesting a review in March 2021. In what has been the natural scheme of things in the past, the expectation was that rates may start to rise from that point. However, many commentators are now predicting that the RBNZ will move the OCR to a negative figure in March of next yea

On 17 April we wrote that the road to recovery for the global economy would be long, reflecting the reality of the economic ‘sudden stop’. Although global share markets were 22% off their lows of 23 March they were still down -15%. At the same time, a typical NZ Funds KiwiSaver Growth client was down just -6.5%, highlighting NZ Funds’ success in mitigating the downside. We also wrote in April that with company valuations significantly lower, and interest rates near zero, there will be large capital flows into share markets, driving up share prices, and the pace of improvement could be fast. We forecast that we would continue to see an upside in share markets over the next 12 – 24 months and thus we had positioned clients’ portfolios to continue to fully participate in the recovery. Some five months later, after mitigating the downside in March and following our positive view in April, NZ Funds has again outperformed our major competitors, this time in a rising market. With

Inflation. Deflation. Disinflation. Financial markets are garbled with so many ‘flations these days. As we enter the last quarter of 2020, a term not discussed since 2002 has re-emerged: Reflation. This refers to government efforts to pump up - or reflate - an economy by flooding it with money. Although reflation is not the same as inflation, it can spark inflation. When the spread of Covid-19 sent global markets into meltdown in March, investors quickly priced in a deflationary shock in the world’s large economies. The severity of the hit to demand became clear as countries, including New Zealand, went into lockdown. However, inflation expectations quickly rebounded, driven by government and central bank stimulus on a scale not seen before. Fast forward to today and there is a growing polarisation among investors - the fear, simultaneously, of both inflationary and deflationary forces in the economy. We have all these deflationary forces developing - unemployment, demand des

The shortest, sharpest recession in living memory gives way to a new early-cycle phase. We expect improving economic data and earnings in the final quarter of 2020 to continue to push shares up. However, risks remain meaningful, suggesting we will have to contend with lingering volatility. Risk, both to the upside and the downside, is evidenced in the earnings announcements of New Zealand listed companies over the past few weeks. Colloquially known as ‘reporting season’ it is a time when companies update investors on their financial results and outlook. The pandemic and its economic aftermath have given rise to ‘haves’ and ‘have nots’ in our economy. Below we describe some of the headlines from the August reporting season. The good Chorus is New Zealand’s largest telecommunications infrastructure company and is building the country’s fixed Ultra-Fast Broadband (UFB) telecommunications network. This week, the Chorus share price recorded new highs. This is a far cry from the

In New Zealand, on the front page of the Financial Market Authority’s (FMA) website , you will find an orange box titled “How much of your KiwiSaver return is made up of fees?” It sits just under the tagline “Promoting fair, efficient and transparent financial markets”. What you will not find is anything on how much a share broker charges to manage your retirement savings. Fees, or how much a client is charged to have their money managed, is an important ingredient to consider if New Zealanders are to make informed investment decisions. Fortunately, fees are also one of the few variables in finance which are relatively certain (performance fees are of course an exception). For many years New Zealand was the ‘wild west’ of fee calculations and disclosure. Even if investment organisations had wanted to disclose what they were charging their clients, there was no single set of rules which others were obligated to follow. This made comparing managers’ fees and costs an exasperating