NZ Herald 13 November 2021

AThis is a new variation on contrarian investing — which is usually buying when others are selling, and selling when others are buying. But you want to invest in industries that many investors shun.

“We get so many queries from people wanting to avoid investments in oil and gas, but few wanting to do so,” says Barry Coates, founder and CEO of the Mindful Money website, which provides information about ethical investing in KiwiSaver and other managed funds. “Our annual surveys show that around three quarters of Kiwis want to avoid investing in fossil fuels.”

However, he adds, “Most KiwiSaver funds still invest in oil and gas. Mindful Money tracks those that don’t — around 19 per cent of funds now have a fossil fuel exclusions policy. This is growing rapidly, up from 2 per cent in 2019.”

A list of funds with the exclusion policy is here. They are the funds many readers might favour, and you could avoid.

The trend away from “unethical” investing is being boosted by the government’s direction that, from December 1, all KiwiSaver default funds are not allowed to invest in fossil fuel production or illegal weapons.

Coates suggests you might want to reconsider your choice. “The International Energy Agency says we don’t need new forms of fossil fuel production. Renewable energy is increasingly going to take over, as we see with the increase in solar and wind power and the use of electricity in EVs, boilers etc.

“This is a reason why there have been warnings about high climate risk for investment in fossil fuels, along with factors such as lower investor support, government regulation and the risk of stranded assets (reserves that can never be used).”

Not convinced? What about looking after your own wealth?

“While the average US share prices (S&P500) rose by around 350 per cent over the past decade, the value of the Dow Jones Oil and Gas Index fell by around 35 per cent. That’s a lot of value lost by investors,” says Coates. He adds, “Good luck with your decision! I’d say do the right thing and go fossil free.”

My tuppence worth: I can understand how you feel. But it doesn’t seem that your planned investment strategy will help your situation.

AOkay, you can take your tongue out of your cheek now!

Thanks for the link you sent, which makes sense of your letter. It’s to an article about how a prominent author of personal finance books predicted “the biggest crash in world history” during October.

It could still happen soon, of course, even though it would be a bit late. But probably not. Anyway, the point I was making last week is that we should invest in such a way that it doesn’t matter much — in the long haul — if the share market crashes. Read on.

ALast week I was responding to the reader’s comments about historical investment returns, rather than going into why I always recommend the ten-year rule. “Everyone already knows what I say about that,” I thought.

But perhaps not. So thanks for doing a great job of explaining the rule. I particularly like your emphasis on never getting yourself into a situation in which you’re forced to sell shares — or property or bonds for that matter — at a loss.

The next Q&A goes into this issue in more detail.

AWell put.

Just one minor quibble. The NZX50 isn’t quite as “diversified as you can get”. It includes basically the 50 biggest companies on the New Zealand stock exchange. The SmallCap index covers the smaller companies, and it can move quite differently.

But that’s not the point. I think the previous writer, you and I all agree that while wide diversification can substantially reduce risk, sharemarket crashes can still hit pretty much the whole lot at once.

AOn your first question, it depends on whether you’re one of those people who are too frugal during their working years, and then have more money than they need later on.

A good way to tell is by looking at your KiwiSaver annual statement, which includes an estimate of how much you will have to spend in retirement. If you also have other savings, use the retirement calculator on sorted.org.nz.

If you seem to be too zealous a saver, it might be better to go for a longer-term mortgage so you have some fun money. But if your retirement prospects look a bit bleak, go for the shorter mortgage and get rid of that debt, so you can then get into serious saving.

On your second question, yes I think it’s okay to use the same provider for KiwiSaver and other managed fund investments — as long as you’re confident you have a good, low-fee provider.

However, the only way to do better with your savings than paying off your mortgage is to make an investment that will earn you a higher return, after fees and tax, than your mortgage interest rate.

That means using a higher-risk fund, and sticking with it even through share market wobbles. Could you cope with that? If it would worry you, it’s best to just concentrate on getting rid of the mortgage.

AYou’re correct that the maximum government contribution you can receive in the year you turn 65 is proportionate to how much of the July to June year you are under 65.

So if you turn 65 on January 1 — halfway through the KiwiSaver year — you would be eligible for half of the normal maximum of $521, which is about $260.

To get that, you need to contribute twice as much, which is $520. When? The government is not fussy about when in the July to June year you made your contributions. You can put the money in at any time, including after you turn 65.

In your case, though, you will have contributed $600 during July to December. So you can stop in January or later, and you will receive your government maximum.

Note, though, that it wouldn’t matter much if you kept contributing to KiwiSaver. After you turn 65 you can withdraw the money at any time, and in the meantime it might not be a bad place to leave it.

ABoo to your provider, who should do better than that at answering you.

I wasn’t sure of the detail on this, so I asked an expert. He starts out by assuming your KiwiSaver fund is a PIE or portfolio investment entity. As far as I know, all KiwiSaver funds are, so we’ll assume that.

The short answer to your question is that KiwiSaver fees are tax deductible, but your provider takes the deduction for you. You don’t need to do anything.

“The provider will automatically attribute the taxable income to the member, and calculate and deduct the tax at the member’s PIR on the taxable income attributable, less the deductible expenses,” he says.

“None of the expenses of the scheme are deductible by the individual in the individual’s personal tax return.”

He also explained the four items from your statement:

• Contributions returned to the government result from an incorrect government contribution to you. “The most common time is when someone is living overseas but made contributions and the IRD could not tell they were overseas. When someone gets to retirement they have to declare the periods they were overseas.”
• Tax corrections “will be because they had the wrong PIR, and the IRD refunded/deducted the additional tax.”
• Fees and tax are “most likely fees and the associated tax deductibility of the fees.”
• PIE Tax “is the tax at the PIR on the net investment PIE earnings.”

Sorted? I hope so.