NZ Herald 2 September 2017

AWhen KiwiSaver started and I wrote about ethical investing — these days more often called socially responsible investing or SRI — I was surprised at how few New Zealanders chose ethical funds.

These days, though, SRI is in. A recent report from the Responsible Investment Association Australasia (RIAA) says screened responsible investment funds increased in 2016 from $1.3 billion to $42.7 billion, accounting for 61 per cent of New Zealand’s total assets under management. That’s massive growth.

“However, most of the KiwiSaver providers moved to just screen out tobacco and controversial weapons, and they could take a further step with more extensive negative screens for issues such as human rights and environmental impact,” says Dr Rodger Spiller, who offers responsible and ethical investment advice through his firm Money Matters, and is a former RIAA director.

But you’re interested in going one step further still — investing in companies or projects that are doing “good” work, rather than merely not doing bad work.

And there are indeed funds that specialize in companies that are “leaders in applying environmental, social and governance (ESG) factors,” says Spiller. “The fixed interest parts of some of these funds also invest in green bonds that enable you to indirectly fund environmental projects.

“There is a great deal of variability in how funds approach ESG, so it pays to look for a charter that spells out the fund’s approach, their published portfolios to see what they are actually investing in, and quarterly reports to investors that include information about engagement activity undertaken on behalf of investors.”

He continues, “If you want to take a step further and invest in sustainability theme sector specific funds, two options identified by RIAA are sustainable agriculture through Southern Pastures and water through Pathfinder.”

However, Spiller warns, “Sector specific funds are far riskier than more diversified market funds, so these would normally be limited to a very small percentage of your portfolio.” In other words, don’t put too many eggs in a single sector basket.

“A further step is impact investing and community finance, for which there is growing interest but little activity,” he says.

He suggests you read the RIAA Benchmarking Report and learn more about RIAA certified funds and certified advisers at http://responsibleinvestment.org.

That website also includes a nifty tool. You can choose New Zealand or Australian funds, and then choose one or two issues you want to support, such as renewable energy or social impact products, and one or two issues you want to avoid, such as tobacco or animal cruelty. Have a play with it.

AOh dear. Clearly my message last week didn’t get through to you.

To summarise: If you learn some good news about a company — such as its favourable tax status — professional investors will have already learnt it, rushed to buy shares and therefore pushed up the price. My main point: no matter how strong a company is, if you pay a high price for the shares it’s not a good investment.

Nor would I take any notice of which shares All Blacks own. The quality of the advice that wealthy people receive is mixed. And even if retirement village shares are good investments for some All Blacks, I would hesitate before jumping on the bandwagon now, perhaps at a much higher price than they paid.

I’m not sure where you got the idea that these companies’ tax-free status will never change. The article you sent me says, “Finance Minister Steven Joyce told NBR the government had no plans for a specific review of the tax position for retirement villages.”

However, Joyce adds, “Inland Revenue is reviewing sectors of the economy that appear to pay a low level of tax relative to their accounting profits. If this work reveals a policy problem for any of the sectors, including the retirement villages sector, the government would put this on the tax policy work programme.”

Of course Joyce’s party may no longer be in power a month from now. But there are no guarantees of what a future government might do.

An important rule: Don’t choose any investment because it seems to be tax-favoured. A government can always change that. Sure you could sell then. But what’s likely to happen to the price you get if the tax treatment worsens? Losers buy high and sell low.

AUnless you’ve already carked — hope not! — your KiwiSaver account is probably already growing, even without the tax credits.

The small amount of interest you’ve received is not a return on your investment but a payment from Inland Revenue because your money sat with them for a while.

You will also receive investment returns, reported every three months. In a higher risk fund, sometimes those returns will be negative — when the markets have fallen. But they will usually be positive and over time your money will grow.

On the four lots of fees, a Milford spokesman says, “Milford charges KiwiSaver members an annual administration fee of $36.00 per annum for administering the account.

“Administration of the account starts when the account is first set up, which includes such steps as client onboarding, Anti-Money Laundering Act checks and sending initial customer correspondence. This fee is spread out over the year and charged on a monthly basis.

“This fee is distinct from the management fee, which only commences once the customer’s money is received and invested.”

Charging four fees in a row does seem a mean way to welcome new people into the fund, but the explanation makes sense, and the fee is small bikkies.

It’s good, though, that you have your eye on fees. The management fees — as opposed to admin fees — can make quite a difference to how fast your account grows. To compare the fees on your fund with other similar funds, see the KiwiSaver Fund Finder on www.sorted.org.nz.

Oh, and why does it take up to three months for your money to leave Inland Revenue? Basically because it takes a while to get the money from the employer, check that’s it’s correct, and send it on to the provider. For more on this see tinyurl.com/Why3months.

AThere’s no such thing as a dumb question about money. And yours is good enough to make it into the column!

New Zealand certainly has funds that specialize in buying shares that pay relatively high dividends.

One example is the NZ Dividend Fund, an exchange traded fund or ETF run by Smartshares, which is owned by the stock exchange, NZX. This is a low-fee index fund, investing in the 25 higher-dividend companies among the biggest 50 companies listed on the exchange.

The tax situation is a little complicated. “Many of the dividends that the fund receives from its investments are fully imputed, but not all,” says NZX. If dividends are fully imputed, that means the companies have already paid tax on their profits, so investors pay no further tax on the dividends received. On dividends that are not fully imputed, the fund pays “top up” income tax.

Adds NZX, “As all the Smartshares ETFs are PIEs, investors pay no further tax on the distributions received, and depending on their circumstances, may be able to utilise tax credits attached to the distributions from the PIE in their tax return if their marginal tax rates are lower than 28 per cent.” In other words, people on lower incomes get a further tax break.

In the year ended July 31 the NZ Dividend Fund return was 4.27 per cent after fees and tax. But — as with any share fund — that return will rise and fall.

When you say the Canadian fund has the “lowest possible risk to a drop in the shares’ value”, that probably means it invests in companies with a solid track record. Nonetheless, the prices of all shares move up and down.

If you invest in a dividend fund or any other share fund, be prepared to watch the value of your investment fall a long way sometimes. But if you’re prepared to ride out the bad times, you’ll probably do pretty well over the long term.