This article was published on 10 July 2010. Some information may be out of date.

Q&As

  • Other ways in which gold is risky
  • The difference between term deposits and bonds
  • Why is ING’s default KiwiSaver scheme cheaper than the very similar ANZ and National Bank schemes?
  • Readers offer some udder ideas on what to call Mum and Dad investors

QI have been following the correspondence on gold in recent columns.

I am inclined to agree with your comments. I invested in gold in the 80s partly by buying gold that was stored for me. Unfortunately the company involved was Goldcorp. Investors lost everything.

I also bought gold coins, which I kept in the bank until they informed me they would not store them any longer. So I kept them in my sock drawer for a few years, until I thought that a bit risky and sold them.

I now have some shares in a gold mining company and, despite the recent rise in gold prices, they have managed to destroy shareholder value by forward selling several year’s production at a small fraction of the present price.

The moral seems to be: gold is a risky investment in common with most others. You have to be lucky or knowledgeable in whom you trust to look after your money.

AYou raise a whole new issue. Thus far, we’ve discussed the rise and fall of the price of gold bullion. But we haven’t looked at how people actually invest in gold. As you point out, all the ways have their risks.

Your bad luck with the mining shares is no different from what could happen to a company in any industry that makes bad management decisions. Still, gold mining shares have got to be among the most volatile.

And with more direct gold purchases, you’ve got to store the metal yourself and risk burglaries, or pay someone to store it and risk their misbehaviour.

This problem doesn’t arise with most other investments. You can certainly lose money in properties, shares and bonds, but not because some Sticky Fingers has disappeared into the sunset with it.

QYou said last week, “Put short-term money in bank term deposits, 3 to 10-year money in bonds, and long-term money in shares and/or property.”

I agree with and follow your advice. I am retired and have enough in bank term deposits (1, 3 and 5 years) to provide my income. I don’t really understand why bonds are better. Could you explain for all inexperienced investors the pros and cons of bonds versus bank term deposits?

AI can see why you’re confused. With both term deposits and bonds, you deposit your money and — all going well — you receive regular interest payments and your money back at the end of the term.

There are some important differences, though. Pretty much all bonds except government bonds are riskier than bank term deposits. That means they wouldn’t have any takers if they didn’t pay higher returns than term deposits. And generally they do.

This might sound contrary to what you’ve read lately. Just last Saturday Brent Sheather wrote about several bond issues that have performed really badly. That’s largely because of another difference between bonds and term deposits — you can sell bonds at any time.

The flexibility is, of course, good. But if you sell before maturity and interest rates have risen since your bought the bond, you will probably get less than you paid for it. Nobody wants a bond that pays below market rates unless they can buy it cheaply.

By the same token, if interest rates have fallen, you’ll sell at a gain. But you can’t predict which way rates will go.

There’s another risk element, too. If the company that issues a bond starts to look financially wobbly — and possibly unable to repay the money — that too will affect its price.

However, if you stick with “investment grade” bonds, which have a credit rating of BBB minus or better, that’s unlikely to happen. And if you hold the bonds until maturity, you eliminate the volatility risk. You might hear that your bonds are worth less in the meantime, but you just ignore it.

Speaking of maturity, some bonds don’t have a maturity date, but are perpetual. Opinions vary on these, but I would suggest a beginner sticks with a range of bonds with fixed repayment dates.

Why do I recommend term deposits for short periods and bonds for longer? You have to pay brokerage on bonds, but over longer periods the higher interest generally more than makes up for that. Also, over longer periods the ability to sell matters more.

For a list of bonds and their ratings, see the Moneymarket section of www.interest.co.nz. In their listings, the “coupon” is the interest rate paid when the bonds were issued. And the “buy yield” is the effective interest you will get if you buy the bond now, taking into account the change in its price since it was issued.

A sharebroker can tell you about your options, including new issues.

QWith the changes to ING over the last few months — it is now 100 per cent owned by ANZ which also owns National Bank — it is interesting to read each of their KiwiSaver investment statements one after the other.

ING has two KiwiSaver schemes, one based on the SIL scheme and one set up as the default scheme. The SIL scheme is different, but ING’s default scheme is broadly identical to the ANZ and National Bank schemes.

In all three schemes, ING is the investment manager and administrator and the options are the same. The directors are the same.

So if I decide that I want about 50 per cent in shares, I can get the same “balanced” option by going to ANZ, the National Bank or ING.

However, if I go to ANZ or the National Bank, I pay investment fees of 0.90 per cent, trustee fees of 0.065 per cent and an admin fee of $24 a year and in-fund costs. In 2009 the MER was 1.23 per cent.

In contrast if I go to ING directly I pay investment fees of 0.50 per cent, trustee fees of 0.05 per cent and admin fee of $33 a year and in-fund costs. The MER in 2009 was 0.60 per cent. Even though the admin fee is higher, the total fees are considerably less in ING unless I have a really low balance.

So the first question is: “Why would I pay more than twice as much to go to ANZ or National Bank compared to ING for the same thing, when ING is owned 100 per cent by ANZ?” Members are paying a lot to have ANZ on their statements as opposed to ING.

The second question is: “How can an adviser for the ANZ Bank recommend the ANZ scheme when they could recommend the ING scheme?”

AGood detective work, but you’re missing one vital clue. The difference is that the default ING KiwiSaver scheme uses some passive management — in international shares, Australasian property and so on — while ANZ and National use only active management, which costs more to run.

“Active managers undertake extensive research of markets and industries and assess the prospects of individual companies,” says Gita Parsot of ANZ. “Based on this assessment, they make decisions about whether to hold a particular asset, how much to hold of it and also when is the right time to sell it.”

In contrast, passive managers simply buy and hold a broad range of assets — often all the shares or bonds in a market index, in which case their funds are called index funds.

The active/passive differences “are reflected in the pricing of the schemes, and in normal circumstances the returns achieved by investors,” says Parsot. “For example the 12-month performance for the ING KiwiSaver Balanced Fund was 17.00 per cent whereas for the ANZ KiwiSaver Balanced Fund it was 19.53 per cent.”

At the risk of being rude, my response to that is, “So what?” A single year’s returns tell you nothing. To be fair, Parsot also refers to “higher long-term returns” from active management. But I wouldn’t necessarily expect that either.

I’m yet to be convinced that active funds perform better than passive over the years, especially after allowing for the lower passive fees.

Anyway, we now have an explanation for the differences you noted. I must say, though, that it would be helpful if ING, ANZ and National Bank explained the active/passive issue in their documents clearly enough for somebody like you — who has obviously done your homework — to understand.

Hopefully the new KiwiSaver disclosure rules that the government is working on will make such issues clearer.

By the way, Parsot also points out that ING’s other KiwiSaver scheme, SIL, “which is actively managed in the same way as the ANZ and The National Bank, has a pricing structure identical to the two bank schemes. In short, the cost of buying an actively managed scheme is the same whether you buy it from ANZ, The National Bank or ING.”

QI have an acronym for the so-called Mum and Dad investors — UDDERS, unwitting donors to dodgy entrepreneurial rogues society.

Their manifesto could read: “We present ourselves willingly for frequent milking by all, posing as pastoral carers, picking up both internal and external parasites obliviously until too late for preventative measures.

Only a full toxic drench draining us of all reserves will be enough to cleanse ourselves in order to be moved to the next pasture, whereupon we repeat earlier experience.

ADere’s de smart investors, and den dere’s all the udders. Makes me sh-udder.

How about dese ideas from udder readers:

  • Why not go the way of the corporates? When a name no longer serves its purpose or becomes irrelevant or embarrassing, they resort to initials. eg BIL, BP, RJI. So perhaps ‘MD investors’ is the way to go.
  • DIY — (after all it’s in our DNA!!). Family — or whanau if you prefer. Domestic. Lay.
  • “Blind emu investors”… why? Because they frequently invest without seeing the risks, and if told something they don’t want to hear they often just bury their head in the sand anyway!
  • Has the term “flock Investors” been suggested? I suspect that is how a number in the industry perceived them. Many were fleeced, led like lambs to the slaughter, (add your own cliché).
  • I suggest “plebian investors”. Plebian investors would be of the “lower” or “middle” classes but have the potential to amass wealth (tick). It describes a group of people with varying degrees of wealth, but not really rich (tick), varying degrees of expertise, but not Buffett (tick), and varying socio/family circumstances, not only “mum” and “dad” (tick).
  • MAD Investors (especially in view of the quality of some of the schemes aimed at such investors).

It’s not a particularly complimentary list. How about a more positive acronym, such as OKs, for ordinary Kiwis?

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to [email protected] or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.