This article was published on 14 November 2015. Some information may be out of date.

Q&As

  • Investing for dividend income okay for some, but has its risks
  • Info outdated on ANZ’s KiwiSaver cash fund holdings
  • BNZ cash fund returns not so bad, but that’s not the main point
  • Reader challenges Kiwibank’s KiwiSaver investing
  • Interest paid on KiwiSaver money-in-waiting

QIt seems that because there is an over-emphasis on capital gain or loss when considering investing in shares, many people are deterred from investing.

There are many companies listed on the New Zealand stock exchange with sustainable dividends returning in excess of 6 per cent pre-tax at a time when bank term deposits are around 3.4 per cent.

There will be a number of people like myself and my father who have mortgage-free homes and also substantial share holdings. It is likely that we will never have to dispose of our shares, so their value is only relevant to our estates. We invest for income, and although it would be nice to feel that our share portfolios/estates are not declining, that should not determine whether we invest or not.

My father is 89 and has pre-tax annual dividend earnings of $56,000. I am 67 and have pre-tax annual dividend earnings of $64,000. For both of us the majority return is in excess of 8 per cent pre-tax.

AFor people in a strong financial position, living off dividends from a wide range of companies can work well. But there are a couple of important “however”s:

  • Holding shares for their dividends with no plans to sell is rather like owning a rental property for the rental income with no plans to sell. You’re tying up a lot of money. That’s fine if you still have plenty to spend, but not if you’re depriving yourself and will then leave heaps to your heirs.

    Mind you, shares have a clear advantage in that respect. If you do decide to sell, you can sell any quantity. You can’t sell a portion of a rental property.

  • Dividends change. As long as a company is doing well, the dividends keep flowing. But they can be slashed to zero in tough times. We wouldn’t expect that to happen across a range of shares, but it’s not unheard of for dividend income from a broad portfolio to halve.

    Not long ago, from September 2007 to September 2009, dividends on the SmartFONZ index fund — which invests in New Zealand’s 50 biggest shares — fell 32 per cent, columnist Brent Sheather said recently.

The scary part is that if you decide to sell some shares to make up for the dividend slide, share prices might well be down too — because times are tough. Not only has the goose stopped laying golden eggs, but she’s not good eating either. (I know, I know, too much poultry after last week’s egg farmer!)

Mind you, interest income on a portfolio of bonds can also fall a long way, as many people have seen in recent years. The answer for many will be investments in both shares and bonds.

Q(From Ana-Marie Lockyer of ANZ) In reference to your article in the weekend titled “BNZ’s cash fund prompts rethink” I just wanted to advise you that ANZ changed the underlying assets of our KiwiSaver Cash Funds and that it is incorrect to suggest that more than half of ANZ’s KiwiSaver cash funds are invested in ANZ’s own products.

Our KiwiSaver cash funds invest in the ANZ Wholesale Cash Fund, rather than term deposits alone. The ANZ Wholesale Cash Fund has a maximum exposure to any one issuer of 20 per cent.

Our investments team’s philosophy is based on quality, liquidity and diversity, and the change to the ANZ Wholesale Cash Fund improved these aspects for our KiwiSaver members. Also, on this basis, a sensibly diversified portfolio in NZ should include exposure to main banks, including ANZ, due to their size in the NZ market.

I recognise you have written a couple of articles about this so would appreciate it if you could ensure the correct information is conveyed to your readers. As always, please don’t hesitate to give us a call if you’d like more information or to check on anything.

AI did get in touch with you, as follows: “As I said in my first article, my info came from Sorted’s KiwiSaver Fund Finder. It says there that each of your three cash funds has a large holding in “Cash Deposit (ANZ Bank)”. Each fund also has several ANZ term deposits. Is that incorrect?”

Your reply: “Thank you for that source information. I attach the link to our current QDS (quarterly disclosure statement) for more information, which demonstrates the current position in respect of the cash fund. It would appear the QDS on Sorted is out of date and we will follow up with them.”

My comment: It’s good to know that ANZ, like BNZ, has moved away from investing heavily in its own deposits. That’s the main issue here. And I’m sorry that I used outdated info. The new info is now on Sorted.

But as an aside, is it unreasonable to wish that someone in such a big organization would check to see if the information fed into www.sorted.org.nz — an unbiased and trusted source for many New Zealanders — is correct?

Q(From Donna Nicolof of BNZ) I wanted to drop you a note to clarify the point you made in relation to returns on our Cash Fund in last weekend’s paper.

“From April 2013 to March 2014, the fund returned 2.37 per cent, comfortably above the 1.67 per cent average for low-risk funds according to Sorted’s KiwiSaver Fund Finder. But from April 2014 to June 2015, its 2.29 per cent was well below the 3.94 per cent average.”

We have used Morningstar Direct to calculate the returns (after fees, but before tax — as opposed to Sorted, where returns are calculated after fees and tax) of our cash fund versus the average of KiwiSaver cash funds. Using this approach, the following returns were calculated:

  • For the 12-month period from April 2013 to March 2014, our fund returned 3.30 per cent versus an average return of 2.90 per cent.
  • For the 15-month period from April 2014 to June 2015, our fund returned 4.00 per cent (on a non-annualised basis) and 3.19 per cent (on an annualised basis) versus an average return of 4.43 per cent and 3.53 per cent, respectively.

We use Morningstar Direct, as it allows an “apples for apples” comparison. By contrast, when you compare the return of our cash fund to the average for low-risk funds on Sorted’s KiwiSaver Fund Finder, this is not the case.

This is because our cash fund’s returns are being compared to funds that are categorised as “Defensive”. According to Sorted’s website, these are funds with a 0 per cent to 9.9 per cent allocation to growth assets.

Although a lot of these funds are indeed cash funds, a closer look at some of the funds shows that they are invested in bonds, not cash (ie government stock and corporate bonds). Their ability to outperform or underperform cash funds is therefore greater, based on the risk profile.

As I’m sure you’ll appreciate, we were surprised at the magnitude of underperformance that was being attributed to our fund in your article (ie for the 15-month period). I hope the above information clarifies this point.

AYes it does, thanks. It’s always tricky to compare managed funds, no two of which are exactly alike. And in the Sorted Defensive Funds comparison I used, cash funds and bond funds can perform quite differently at times.

Your comparison, of cash funds only, is fairer. And it shows that the BNZ’s KwiSaver cash fund didn’t underperform the average nearly as badly in the recent period.

I need to go off on a tangent here. I’ve always said it’s a mistake to focus on KiwiSaver funds’ returns. There’s absolutely no guarantee that past good or bad performance will continue into the future. Furthermore, the BNZ’s KiwiSaver scheme started only in 2013, so that makes any conclusions about performance even dodgier.

The only reason I looked at returns last week was that someone suggested BNZ might “justify” investing only in its own deposits if their returns had been superior. So I was pointing out that that argument held no water.

Anyway, it’s great that this is no longer an issue, as BNZ is now diversifying its cash fund holdings.

QIn regards to “Kiwibank’s Kiwi Wealth cash fund holds no Kiwibank deposits”, in last week’s column.

I understand your argument on fiduciary obligations. But looking at it from a completely different angle, could you please explain why wouldn’t a bank allocate some cash fund investments within their own bank?

Doesn’t it speak volumes when the Kiwibank does not think the Kiwibank is a good place to invest in?

AI don’t think so. Kiwibank’s cash fund apparently will hold its own deposits sometimes. It simply chooses what deposits are best at the time.

“Kiwi Wealth operates under an independent board framework with a clear separation between Kiwibank and the wealth businesses,” says Joe Bishop, head of retail wealth at Gareth Morgan Investments, which runs the Kiwi Wealth KiwiSaver scheme.

“This means that Kiwibank, for the purposes of related party investment, will treat Kiwi Wealth like any other investing customer. And Kiwi Wealth will treat the bank like any other deposit-taking institution.

“Both companies deal with each other on an arms-length, commercial basis. It’s generally preferable for a bank to treat its wealth management division like this because it’s important for depositors and shareholders that the funding base is not overly dependent on related party investment.”

Bishop adds that the only consideration when choosing term deposits is fiduciary duty — the obligation to put members’ interests first.

“This includes a determination of which rates are the best available, with a mind to keeping a prudent diversification of issuers in the portfolio. There is no reason not to allocate to the owner bank if the rates are attractive — as long as the concentration is prudent and the bank is solid.

“Like all banks, Kiwibank will, from time to time, have funding needs that means it can offer higher term deposit rates. If they make sense in a diversified portfolio, Kiwi Wealth could and would invest in these,” says Bishop.

QJust in relation to one of the questions posted last week by your reader, headed “Processing times”.

While KiwiSaver contributions are held in the IRD for processing, they are I believe held in interest-bearing accounts, and this interest is passed on to the investor regularly. This should theoretically offset the majority of loss in returns experienced by the investor.

AYou’re right, and it’s a good point. Last time I looked the interest rate had dropped to 1.57 per cent a year — nothing to write home about. But in May it rose to 2.35 per cent. And given that it’s tax exempt, that’s not a bad return.

Back in the early days of KiwiSaver, from July 2007 to March 2009, the rate was 5.36 per cent. So, when the global financial crisis came in 2007–08, many people were glad that some of their money was sitting around Inland Revenue rather than plunging in a higher-risk KiwiSaver fund.

These days, we should probably be fairly indifferent.

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.