This article was published on 13 December 2014. Some information may be out of date.

Q&As

  • New Zealanders are ‘all talk and no action’ on ethical funds
  • Don’t try to time markets with your KiwiSaver account
  • Why we need a capital gains tax
  • Why rental property should be taxed like other businesses
  • Landlords not necessarily admirable, but…

QI am disappointed that my KiwiSaver provider, ASB, has decided to close down its FirstChoice KiwiSaver Scheme, and in particular the Global Sustainability Fund.

Investing capital into a retirement savings scheme is not just about risk and return. Obviously I want to avoid long-term risk (short-term risk is just fine for somebody young like me), and I want a reasonable return.

But those two things are only a part of the equation. I earned the money through my own daily efforts. When that money is invested it provides capital for the activities of others. Those activities are not all equal in my eyes, and some I don’t want to support.

As much as possible I want to avoid making investments into companies involved in weapon development, non-renewable primary extraction and cigarettes. The Global Sustainability Fund is an easy way to focus my investments into companies that are making the world a better place, while also providing exemplary returns.

I have been a happy customer of ASB at least since I started with a tertiary student account in 1994. I have a large mortgage with ASB, a credit card et cetera. I was preparing to move funds from my university retirement scheme into my KiwiSaver scheme, but now that plan has been put on hold, because of ASB’s decision to close down the FirstChoice KiwiSaver scheme.

I sincerely hope that ASB reconsiders closing down the Global Sustainability Fund, or at the very least that they develop an alternative ethical investment fund within their ASB KiwiSaver Scheme to replace it. This is especially important as high-performance ethical alternatives are very thin on the ground in the current KiwiSaver market.

AWell put. But it seems you’re not typical. Most New Zealanders are apparently “all talk and no action” when it comes to ethical — or socially responsible or sustainable — investing.

On the one hand, we have the Sustainable Business Network recently saying a survey of 1400 New Zealanders found, “90 per cent of respondents want to be actively investing in companies with a strong sustainability commitment.”

Also, “More than 90 per cent would avoid investing in labour exploitation, tobacco and arms, while more than 80 per cent would avoid investing in gambling, pornography and fossil fuels.”

On the other hand, only about 450 people were enrolled in your Global Sustainability Fund at the end of October — just over 3 per cent of all FirstChoice KiwiSaver Scheme members, says ASB Group Investments. And when you include ASB’s other much bigger KiwiSaver scheme, only one in a thousand members is in the Global Sustainability Fund.

Other providers who offer these funds — we’ll call them “ethical funds” to keep it simple — also report a low uptake.

Perhaps that’s why ASB is not planning to offer another ethical fund after it closes its FirstChoice KiwiSaver scheme at the end of this year.

“We continue to survey our customer base, looking to add new products and services that appeal to our customers’ needs and wants,” says ASB’s Nick Stanhope. “We had hoped that the sustainable investment option within FirstChoice KiwiSaver would have been more popular than the one in 1,000 KiwiSaver members that chose to invest.”

When FirstChoice is closed, you will be allocated to one of the nine KiwiSaver default schemes — unless you move your account elsewhere. The default funds invest broadly, rather than ethically, and are much lower risk than your current Global Sustainability Fund — so they will probably have lower average returns.

However, you can switch, at any time, to another ethical fund by approaching the new provider. What’s available? A search through the KiwiSaver Fund Finder on www.sorted.org.nz for the words “ethical”, “socially responsible” “SRI” or “sustainable”, gives us:

  • In the balanced funds, Craigs Investment Partners Kiwistart Balanced SRI Fund, Fidelity’s Ethical Kiwi Fund and Grosvenor’s Socially Responsible Investment Balanced Fund.

    Another balanced ethical fund is SuperLife’s Ethica Fund, which for some reason isn’t currently in the Fund Finder. This week NZX announced that it’s buying SuperLife, but SuperLife director Michael Chamberlain says all of its KiwiSaver funds, including Ethica, will continue to operate as usual.

  • In the growth funds, Grosvenor’s Socially Responsible Investment Growth Fund.
  • In the aggressive funds, OneAnswer’s Sustainable Growth Interest Fund.

You might want to choose a new ethical fund partly on the basis of risk. Your current fund is aggressive, investing fully in shares, which explains its strong recent returns. But while it’s long-term returns are likely to be high, such funds perform badly when share markets fall.

I suggest you use the “Find the right type of fund for you” feature on the KiwiSaver Fund Finder. Then choose an ethical fund at the recommended risk level.

It sounds as if you’re reasonably comfortable with some risk. But other readers wanting an ethical fund with lower risk than a balanced fund could put part of their money in a balanced ethical fund and part in the same provider’s lowest risk fund, to bring down their average risk. Most providers will permit that.

QAged 49, currently have $55,000 in growth-based Kiwisaver fund, and the going is good at present.

Widowed, so mine will be the only income come retirement. Have freehold home, no debt.

Is there a point (ie when markets start to trend down) that I should transfer to a conservative fund, to protect investment, and switch back when things improve? Or is it simply best to leave in growth fund until closer to retirement ie 65ish (or earlier?).

AIf only we all knew when a share market downturn was starting, as opposed to a downwards blip. Ditto for an upturn. Even the professionals get market timing wrong all the time. Many people lose lots by trying.

So what should you do? The test is this: Would you panic and switch to a lower-risk fund if your account balance halved — at the very worst time to switch? If yes, I suggest you reduce your risk now. If no, stick with your growth fund until you’re about ten years away from spending the money. Then gradually move to a lower-risk fund.

If you stay in your growth fund, you’ll almost certainly end up with more. But the ride will — not might, but will — be bumpy.

QWould you clarify your recent comment regarding the case for and against landlords please, when you stated, “But capital gains — whether on property or shares or anything else — should be taxable”. This seems to be a political view rather than a financial view.

There are many pros and cons regarding a capital gains tax, as I am sure you are fully aware, but it’s not a simple matter that capital gains on property or shares or anything else should be taxable.

New Zealand tax law already taxes people who make profits from capital gains by trading in property or shares or anything else. Perhaps this should be policed more determinedly by the IRD if it’s not working properly. Or are you suggesting that NZ would be better off by taxing all capital gains regardless of whether the gains are earned by trading or investing?

AThis column is hardly a politics-free zone. And yes, I think we would benefit from a broad-based capital gains tax.

Why should some people be taxed on income earned by the sweat of their brow while others are not taxed on profits from selling something that rose in value while they lay in a hammock? Governments in almost every other developed country tax capital gains. It’s weird that New Zealand doesn’t.

You’re right that there are pros and cons and complexities to such a tax. We discussed them in this column in the run-up to this year’s election, so let’s not go into all that again. But New Zealand could learn heaps from other countries’ mistakes and, I reckon, introduce a pretty fair capital gains tax.

On the current law, the test is actually whether somebody bought an item with the intention of selling at a profit, rather than whether they are a trader. And therein lies a problem. It’s not easy to prove someone’s intentions, so it makes the law tricky to apply. We can do better.

QI’m not sure why people see owning rental property as different from other businesses. A reader last week suggested that losses from a rental property should not be deducted from wage income because it is “unrelated”. Three responses:

  • Many start up businesses need a huge capital investment and make losses for the first few years, meaning often the business owners will have a salaried job as well to help make ends meet.
  • Once the rental property (or other business) starts making a profit, the income is combined for tax purposes — not so unrelated then.
  • If the landlord is really a “property investor” any capital gains are actually profit and therefore taxable — it just needs a bit more effort by the IRD to sort one from the other.

AYou argue the case well.

To clarify your second point, when profits and salaries are added together the tax is much higher than if each were taxed separately.

QYour response to a recent correspondent who shows disdain for landlords was sensible. However, I was puzzled by your last comment that, “I can’t say anyone makes it on to my list (of heroes) by being a landlord”.

Landlords like myself are ordinary people who work hard to provide for their families and their retirement, and yes we even give to charity and help out in the community. Very few people are full-time landlords, and most of us can be found working in all sorts of occupations.

I have worked in two jobs in order to save for a deposit on a rental, and continue to work full-time to cover mortgages, rates and maintenance costs. Owning a rental is hard work, but fear of poverty in old age is a great motivator.

Most landlords have also been tenants at some stage, and some of us — like myself — have come from a poor family background and have some understanding from a tenant’s perspective. We also know that people will not stay long in our properties if we don’t treat them with respect, and it can be costly to change tenants. While some landlords can be unscrupulous, this can also apply to some tenants, and people who exploit others can be found among all occupations.

As for exploiting the poor, in fact rentals provide a service, and the rent of low-income earners is often paid for by welfare agencies.

AOh dear. I didn’t mean to disparage landlords. Some of my best friends own rental property.

It’s just that the correspondent said some people admire those who have become wealthy through property investment. I don’t see that as particularly admirable — or despicable.

Anyway, you’ve done a good job of defending yourself and others like you.

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.