NZ Herald 13 August 2022

AEveryone can always do better with their money.

You’re actually in a stronger position than many — if I’m right in assuming you have no debt other than your mortgage. You own your home, and from October you will receive NZ Super.

Still, there’s probably more that can be done to make your life comfortable, with the help of MoneyTalks. This is a free service, run by FinCap, a non-government organisation that supports 200 free financial mentoring services around New Zealand. It’s funded by the Ministry of Social Development.

“We can absolutely help in a situation like this,” says Ange Smart, team lead at MoneyTalks. “Firstly, we would let them know they are not alone, that this is far more common than the average Kiwi realises, and often it’s because of circumstances out of our control.

“It’s never too late to seek help from a financial mentor. They are basically super heroes who don’t wear capes.

“Importantly we make sure that a person’s immediate needs are met, have they got enough kai, is their power connected etc. Once that has been established, we can find out where in Aotearoa they are and hook them up with a financial mentor that they can either see in person or communicate virtually with.

“For this example, our Helpline advisers can give suggestions on how to help in the immediate, but I think they would really benefit from having a financial mentor walk alongside them and make sure they are looked after financially but also emotionally, by engaging other wraparound services if needed.

“Financial mentors can renegotiate outstanding debts to make them manageable, can advocate to ensure that the client is receiving all eligible entitlements from WINZ, and set up a plan for the future to enable future financial wellbeing. There is always hope, the hardest step is making that first call.”

Go to moneytalks.co.nz for more information. And do make that call!

AIt’s great to hear from someone who wants to move their KiwiSaver money not because of what the markets are doing, but because they have used the tools on Sorted — probably the KiwiSaver Fund Finder.

You’ve obviously answered questions there about when you expect to spend the money, and how well you could cope with market volatility, and realised it would be good to move to a growth fund. In answer to your questions:

• I don’t think any providers charge a fee for moving from one of their funds to another.
• If you leave your current savings where they are, they almost certainly won’t grow as much as in a growth fund, over the long term. But maybe you’re a little concerned about how you will feel when — not if but when — your balance drops a lot in the next downturn. It will rise again, but it may take a while.

  If that’s the case, you could move gradually, so you get used to the increased volatility. Perhaps switch a third of your current savings to growth now, another third in a year or two, and the rest a couple of years later.

• Moving to a less conservative fund — which is what you’re planning — is a good move in a downturn. The value of the units in the growth fund will probably have dropped more than in the balanced fund, so you’re buying bargains.

AI understand where you’re coming from, but I’m coming from somewhere else. And the research supports me!

I used the same before-fees return for both funds because there is no reason to think ANZ’s KiwiSaver Growth Fund will perform better than ASB’s similar fund in future. Smart Investor shows us that ASB’s fund did better than ANZ’s fund in two of the last four years, in 2018 and 2019. Who knows what lies ahead?

While it’s true that it’s better to look at a fund’s ten-year returns than its shorter-term returns — which can be all over the place, ten-year returns are still a poor guide for the future.

A while back, US research firm Lipper Analytical Services looked at the 20 best performing US share funds in 1988 to 1998. How did they do in the following decade?

Out of 2322 funds, the one that topped the list in the previous decade came 1485^th. The best that any of the 20 could do was 208^th. The average performance of the previous decade’s top twenty came three quarters of the way down the list. In other words, most performed abysmally.

I’ve tried in vain to find more recent research that similarly compares two decades. But I did find lots of research by S&P Dow Jones Indices over three- and five-year periods.

Their paper on US share funds titled “Does Past Performance Matter? The Persistence Scorecard” says, “For funds categorized as top performers in September 2017, 47 per cent maintained their top-quartile performance the subsequent year. However, there was a dramatic fall in persistence afterward — just 8 per cent of domestic equity funds remained in the top quartile in the three-year period ending September 2019.

“This result (8 per cent) is consistent with the notion that historical performance is only randomly associated with future performance.”

The paper also notes that the longer the period, the less likely top-performing funds will stay successful.

Over five years, “Less than 3 per cent of equity funds in all categories maintained their top-quartile status at the end of the five-year measurement period. In fact, no large-cap fund (a fund that invests in big companies) was able to consistently deliver top-quartile performance by the end of the fifth year.”

What it all amounts to: it’s foolish to expect funds that have done well to continue to do well.

ALet’s put other readers into the picture. Passive funds — sometimes called index funds — invest in all the shares in a market index and don’t trade unless the index changes. They are cheap to run, and so charge low fees.

Active funds — the traditional type — have managers who choose which shares to invest in, and when to buy and sell them. Surely that’s better than just buying and holding the whole lot passively?

The trouble is that picking good shares that are selling cheaply — what you call undervalued companies — is devilishly hard. If a fund manager thinks a company is going to perform better than expected, she or he has to buy that company’s shares before another big investor realises and gets in and buys them, pushing up the price.

The company may still be good, but if its share price is no longer cheap, it’s not a particularly good investment.

As noted in the previous Q&A, it’s hard to keep on being one of the top fund managers.

The growing realisation that low-fee passive funds are a better bet over the long term means they are becoming increasingly popular around the world — which is what’s worrying you.

But there’s a long, long way to go before all share funds — including higher-risk KiwiSaver funds — are passive.

Even in the US, where the move to passive is more advanced, passive funds account for only about 20 per cent of the value of the US share market, says S&P Dow Jones.

And while the percentages in the US, New Zealand and elsewhere are likely to keep growing, they won’t get anywhere near 100 per cent for a couple of reasons:

• Many people have trouble believing that active fund managers can’t beat index funds over the longer term. After all, in most other fields of endeavour, if you try harder you do better. And active managers’ marketers will keep trying to convince people that they are the special ones that can keep outperforming everyone else.
• Imagine if we did start getting towards having only passive fund management. The few active managers left would find it quite easy to be the first to spot undervalued companies, because they would have few competitors. Their performance would be good enough, despite their higher fees, for some investors to prefer them.

We would reach an equilibrium with enough active managers still operating to keep the market efficient at correctly pricing each company’s shares.

Meanwhile, most of us could stick with our passive funds.

AMakes sense. Thanks for your expertise on this.