This article was published on 18 April 2020. Some information may be out of date.

QI saw in the news that Auckland airport is issuing a release of shares and that they are likely to be the first of many companies trying to raise capital in this economic climate.

We have around $100,000 sitting in the bank left over from a sale of a property. We are mortgage-free and in our mid fifties, with reasonably secure jobs. Apart from our KiwiSaver funds we have no shares and have no idea about how to go about buying some.

I know that you usually recommend buying into a fund with a balance of shares. But this seems to be a unique opportunity to both support the recovery of our country and buy into established companies at the same time. Can you please give some advice.

ASorry, but you’re not eligible to buy the shares. Only current shareholders can take part in the share purchase plan.

But that’s probably a good thing. I applaud your desire to help New Zealand companies cope with the Covid-19 — and few companies will be harder hit than Auckland Airport. But you’re right, I always recommend starting in shares by investing in a share fund.

Why? There’s a saying in financial circles that there’s no such thing as a free lunch. If you want to reduce your risk, you have to accept a lower average return. But there’s one exception, which applies if you invest in a wide range of shares, either directly or in a share fund.

You reduce your risk because not all the shares will fall, or go out of business, together. But you get the same average return as you would if you bought just one share.

Some interesting research quoted by financial adviser firm Bloomsbury Associates looked at the NZX50 share index and the 50 shares that make up the index, in the ten years ending April 2019. They found:

  • Only 26 per cent of the companies had higher returns than the index, while 74 per cent — nearly three quarters — had lower returns. What’s more, 14 per cent made losses over that decade.
  • Only one out of the 50 companies had lower volatility than the index. One!

That tells us there’s only a one in four chance of buying an individual share that performs better than the index. And it will almost certainly be more volatile than the index. As we’re learning lately, volatility can be hard to cope with.

I’m not saying that eligible people shouldn’t buy the Auckland Airport shares, especially as they are being offered at a discount. They might end up being a great investment for people who already hold a wide range of shares.

But for you starting out in shares, I think drip feeding into a low-fee non-KiwiSaver index fund over a few months would work best. There’s more on index funds, which simply invest in all the shares in a market index, below.

QI’ve been a bit concerned by the rise of online Facebook groups and Reddit threads of newbie (and experienced) investors asking things like, “What do you think about XYZ stock?”.

Seems like the market drop is resulting in a surge of people thinking they will be great stock pickers, and there is easy money to be made, based simply on the fact a company’s stock price has gone down. The tone has been shifting from investment to trading/speculating.

It is a big concern, especially because there will be many short-term stories around quick 20 per cent, 30 per cent, or 50 per cent returns by people speculating on individual stocks, which draws others in. But this completely ignores the purpose of investing and is no reflection of their ability to deliver over the long term.

AThat is indeed a worry. The people who do well tend to crow about it. The others slink away.

Time and again it’s proven that most people don’t do well out of short-term share speculation. Unless you enjoy a gamble with a tiny portion of your savings, give it a miss.

QI thought you might like some more positive news. I have had my KiwiSaver in Milford’s Active Growth fund for several years now. Like others, of course I was worried about the Covid effect on global markets.

I’d like to put a plug out for Milford, as they adopted defensive strategies in February, got out of investments that would likely fall, and into others that might rise. End result is my KiwiSaver is only down 10.5 per cent from Jan 1st this year!

And, I am 69 years old and happy to stay in the workforce for a few more years still.

AIt’s a sign of the times that you’re content with a 10 per cent drop in your KiwiSaver balance. But positivity is great.

Without knocking what you say, a few other funds have actually performed better, including at least one index fund.

This is of note because managers of actively managed funds, such as yours, like to point out that they can make moves to reduce losses before a market falls, whereas managers of index are stuck, unable to take defensive action. That means, the argument goes, that index funds perform worse in downturns.

But it seems most active managers aren’t actually that good at picking what to do when. Or perhaps they’re just too big.

“It’s worth noting that the increasing challenge for active managers in New Zealand is that they are now running quite large funds, and this makes it harder and harder to implement their strategies and to also react,” says Dean Anderson, founder and CEO of Kernel, an investment platform and index fund manager. “If you’ve got a billion dollar fund and the market starts to fall, you can’t just turn 40 per cent of it into cash easily.”

So how has Anderson’s Kernel NZ 20 Index fund performed lately? For the three months ending March 30 that fund’s return was minus 10.36 per cent after fees and before tax, according to Morningstar NZ.

That compares with your fund’s minus 13.11 per cent over the same period — despite the fact that your fund includes some non-share investments that were probably less affected by the downturn. (Your 10.5 per cent number is different, perhaps, because you’re including gains since March 30.)

Anderson adds that only 1 out of 15 active NZ shares funds beat his index fund in the period. The average active fund manager’s return was minus 13.6 per cent after fees and before tax. What’s more, Kernel’s commercial property index fund beat all its active fund competitors.

This isn’t a one-off. After the other significant NZ share downturn in the last few years, in October 2018, index fund manager Smartshares said, “Only two of the 19 NZ active equity funds beat the market, according to Morningstar, but all of our funds did.”

Similar stories come in from overseas. Right on deadline for this column I received a press release that starts,”This year’s market sell-off has triggered the worst underperformance for active fund managers against passive funds in years, according to the latest survey of 1,350 funds with assets totalling $4 trillion by Copley Fund Research.”

The upshot of all this? I’ve always recommended index funds — a.k.a. passive funds — because they are cheaper to run so their fees are lower. And over time their average returns after fees tend to be amongst the best. A few active managers might beat them, but nobody can pick which ones in advance.

I think we can conclude that index funds are the best bet in falling markets as well as the more common growing markets.

QBecause I am relatively close to retirement, some time ago I changed my company super scheme to a preservation (100 per cent cash) fund with Fisher Funds. So I was not unduly alarmed at the recent fall in equities.

However on checking my account I was surprised to find that there had been a fall over the month; not huge but puzzling given that the fund is supposed to preserve the capital.

I questioned Fisher Funds and got an answer about unit prices fluctuating which did not really answer my question. What I cannot understand is how a cash fund can fall. And if it does, why not just leave the money in a bank term deposit where there would be no fluctuations?

AYou got it slightly wrong about the 100 per cent cash. Fisher Funds’ Preservation Fund holds only 30 per cent cash and cash equivalents — securities that will mature in less than 90 days, says chief investment officer Frank Jasper. The rest is New Zealand fixed interest investments.

“All of the investments are securities rated A minus or better with a portfolio average rating of AA minus,” says Jasper. Many of them are issued by banks.

Most of the time these investments won’t lose value — or not so you would notice. However, “The Preservation Fund dropped in value by 0.28 per cent in March,” says Jasper. “While it is very unusual for cash and short maturity fixed interest investments to fall in value it can happen in extreme circumstances.

“We are living through extreme times and extreme levels of market volatility. The uncertain outlook in March meant investors demanded higher than normal returns to take on even modest risks.

“In a cash and fixed interest portfolio that resulted in wider credit spreads, the extra return demanded for lending to anyone other than the government, leading to higher overall interest rates.”

Got all that? The main point is that when interest rates rise, the value of fixed interest investments falls — and with it the unit prices in your fund.

So why not, as you suggest, just use a bank term deposit?

“Over time a portfolio made up of cash and short maturity fixed income investments, like the Preservation fund, is likely to deliver a return in line with bank term deposits — although returns will fluctuate month to month, quarter to quarter,” says Jasper.

But there are advantages over a bank term deposit:

  • Diversification. Your fund invests in “a range of different entities including the NZ Government, banks and supranationals. While we would hope that the benefits of this diversification are never needed it’s a good thing to have,” says Jasper.
  • Tax. The fund is a Portfolio Investment Entity (PIE), with a maximum tax rate of 28 per cent.
  • Flexibility. Over 65s can withdraw money usually within a day or two, whereas term deposits are locked in.

Perhaps “Preservation” is the wrong name for the fund, but it seems to be pretty low-risk.

A Fisher Funds spokesperson adds, “Please pass on our apologies that the answer our team gave wasn’t adequate. I have followed up with our client-facing teams on this.”

QWhy do you always get it wrong with gold? I would have thought by now you would realise your mistake.

Last Saturday you put a chart of gold in your column. Interesting, it was in US dollars. We don’t live in the US!! It is hard to believe someone who is writing a financial column could make such a basic mistake as not doing the exchange rate conversion!!

Over the last 12 months, as at writing, shares are down 18 to 20 per cent, gold is up 44.75 per cent. That’s a difference of some 64 per cent. Hard to believe someone can be so wrong. Please try harder to give accurate information.


Now that I’ve recovered, I’ve got a couple of questions for you:

  • Why on earth do you read my column if I always get this wrong?
  • Why is it that many of the angriest correspondents over the years have been big fans of gold? You should love that I’m not urging readers to buy gold. It reduces your competition.

Never mind. In these trying times we all get a bit testy occasionally. And I take your point — perhaps the gold chart should have been in New Zealand dollars.

But, as I was trying to point out, during the period the correspondent was looking at there had been a big drop in the Kiwi dollar versus the US dollar. So a lot of his gold gains were in fact currency gains. The chart removed that effect, and looked at just what happened to gold itself.

What’s more, everyone always quotes gold prices in US dollars. If you look at the Markets page in this section of the paper, you’ll see gold listed in American not Kiwi dollars. And on the radio they give the gold price in US dollars, often without even labelling it as such.

But okay, let’s look at the NZ dollar story — although not over 12 months. You can’t conclude anything over such a short period. How about the last 20 years? According to, over that period, up to last Wednesday:

  • The price in US dollars has risen 524 per cent.
  • The price in NZ dollars has risen 401 per cent. Hmmm.

NZ Shares Beat Gold Over 20 Years

Value of $100 invested on 1 April 2000

NZ SharesGold US$Gold NZ$20022004200620082010201220142016201820200200400600800

This week’s graph gets around the currency issue by showing what would have happened to a $100 investment made in April 2000 in gold priced in both US and Kiwi dollars, as well as in the NZX50 share index including dividends. All numbers are before fees and tax.

Not only do shares win, despite the recent plunge, but you can also see how volatile gold is, zooming up after the global financial crisis, but then plummeting.

If you think about it, over time we would expect average shares prices to grow more than inflation. They represent ownership in companies coming up with increasingly better ways to produce goods and services.

I’m not so sure about gold. Sure it’s useful — in jewellery, dentistry, electronics and computers, medals and statues. But there’s always the threat that someone will come up with great substitutes for any of these.

QI’m the one who wrote to you last week about gold.

To even the field over price patterns, I’ve now done an investment from 2001 to 2020, and added dividends, tax and fees for the NZX50 share index.

The NZX50 ends at $817,000, and gold at $598,000. So a well deserved win for the NZX50. I agree that the best place for your 10-year investment funds is shares.

Gold still has its place in the hard asset portion of your portfolio. Perth Mint allows Australian and New Zealand citizens no annual fee, and no hold charge, for those interested.

AThanks for being fair and looking at another longer period — and for reporting back on it. It’s interesting to see your findings are similar to those in the above Q&A, for a slightly different period.

Clearly you’re not one of the people sometimes called “gold bugs” who can’t see past the shine!

A Perth Mint spokeswoman says one of its investment options is to buy unallocated gold, which doesn’t have any ongoing storage fee. But “there are several and differing fees pertaining to each of the account types we offer. These include transaction, fabrication and storage fees.” See their website.

QI agree with most of your comments regarding gold. The disadvantages of owning gold were very clear, but let me add the worst one: a wide buy/sell spread for physical gold.

However, the usual comments in your column revolve around the comparison of a single asset versus another, such as the perennial discussion on shares v. property, or the recent one on gold v. shares. Such debates are misleading because they mask the fact that investment performance is driven by asset allocation or portfolio construction, not by the individual components.

Portfolios with a modest (say, 15 per cent) allocation to gold show a much better risk-adjusted return than portfolios without gold. Gold is useful because it’s inversely correlated to most assets. A well constructed portfolio has assets with low correlation among each other.

Of course, a passive portfolio of 100% index funds would perform better than any other portfolio in the “very long term.” But you have to endure enormous volatility in the meantime.

The holy grail of investing is to achieve a higher return with lower risk. A gold allocation can help you with it because of its inverse price fluctuation. It’s the overall portfolio performance that matters, not whether gold underperforms within a given timeframe.

AYou make some good points. I did say last week that holding some gold helps with diversification, but you go into this in much more depth.

But first, the buy/sell spread. That’s basically the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept. A wide spread means the market isn’t “liquid”, so it might not be easy to sell gold at an acceptable price in a hurry.

Moving on to the importance of investing in a range of different assets, your comments echo mine in today’s first Q&A. Diversification across shares or across different types of assets can reduce risk without sacrificing return.

Academics at Trinity College, Dublin, in 2006 looked at the correlation between gold and share returns in the US, UK and Germany, to see if gold is:

  • A good hedge, which means over time its price tends to rise when shares fall, and the reverse.
  • A good safe haven in times of extreme market turbulence.

They found that gold is, indeed, a good hedge. “In addition, since the price of gold in the US increases when stock prices fall, gold has the potential to compensate investors for losses with stocks, thereby positively influencing market sentiment and the resiliency of the financial system,” say the researchers.

However, it’s not so good as a safe haven, if an investor doesn’t already hold gold over the long term but jumps in after shares plunge.

“Investors who start purchasing gold the day after an extreme negative shock lose money after about 15 trading days,” say the researchers, Dirk Baur and Brian Lucey. That’s because share prices tend to bounce back up, and so gold tends to fall.

The conclusion: consider holding a small portion of gold over the long term, to calm down movements in your whole “portfolio” of investments. But don’t jump in and out of it.

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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.