This article was published on 21 October 2006. Some information may be out of date.


  • Is there an 18-year cycle for industrial and resource shares?
  • Why index fund of Aussie shares has done much worse than its index.
  • Limited submissions on tax changes not good enough.
  • NZ shares, already favoured, shouldn’t get still more favourable tax treatment.

QShame on you Mary Holm. Your advice last week to that person regarding an Australian resources fund was disgraceful. Don’t be so lazy.

If you look back at the past century you will notice that most bull markets tend to last around 17–18 years, and it tends to swap between resources and industrials each time.

Just going back recently, in the 1970s resources were booming and industrials were floundering. This resources boom lasted 18 years. Then, in 1982 just as the Wall Street Journal had the words “Equities are Dead” all over the front page, what happened? The resources boom finished and industrials started to rise.

This bull market in industrials lasted — you guessed it — 18 years. During this bull market there were some gut wrenching corrections (1987 crash and 1997 Asian meltdown), but it still continued to rise over the 18 years.

In 2000, industrials peaked and the rise in commodities began. Gold has gone from $250 to $600 over this time for example. I fully expect this commodity bull market to last for 18 years, but with the usual corrections along the way, which should be viewed as buying opportunities.

Try reading a book called ‘Hot Commodities’ by Jim Rogers. He was the partner with George Soros who set up the Quantam Fund in the US, and both made hundreds of millions of dollars over the decades.

His advice in a nutshell is to leave industrial stocks alone for the next ten years and they will only grind sideways. Stick with resources until 2015–2017, then swap back to industrials. This is where you will make your best money.

Additionally check out a website called Zeal. They have some fantastic free essays on this subject. Also is an excellent website.

The Resources Bull is here Mary, and it’s here for another decade!

AIt’s all yours.

I’ve read many articles over the years about patterns in investment performance. And too often I’ve watched, over the following years, the markets doing the opposite to what was predicted.

It would help if you could come up with a logical explanation for an 18-year cycle. But even then I doubt if you would convince me to stray from good old diversification.

Lazy? No. But I put energy into projects that seem likely to be worthwhile.

QI am a supporter of index funds due to lower fees, spread of risk etc., all dealt with by you in the past.

Following on from the letter in last week’s column about the Australian resource stocks and index funds, perhaps you could comment on the following regarding the smartOzzy fund (previously Tower Tortis-Ozzy).

From the takeover of the fund by Smartshares Ltd. from June 30 to October 13:

  • The ASX 200 has increased by approximately 4.3 per cent.
  • The ASX 20 has increased by approximately 2.3 per cent.
  • The Ozzy has decreased by approximately 7.6 per cent, from $3.40 to $3.14.

While these figures may not be exact, I would have expected the Ozzy rate to closer reflect the weighted rates of the ASX 20.

While BHP is still some 8.5 per cent below its end June price, the three major banks, Westfield etc. are all up.

Can you advise where my thinking is astray?

AYou forgot about changes in the value of the Kiwi dollar.

Before we go further into that, for those who don’t know, index funds invest in all the shares in a market index.

The smartOzzy is a New Zealand-based fund that tracks the ASX 20 index of the 20 biggest companies listed on the Australian stock exchange.

And, as you would expect, the fund does perform the same as the index, says Darren Chin, fund analyst for Smartshares.

The only trouble is that — contrary to forecasts earlier this year — the New Zealand dollar has been the best performing major currency during the last three months, according to Bloomberg.

That means that, from June 30 to October 13, the Kiwi dollar rose considerably relative to the Aussie dollar, lowering the value of any Australian investment for New Zealanders.

The value of all international investments is affected by currency changes. But, as Chin says, that “can be both a blessing and a curse.” When the Kiwi dollar falls, that boosts New Zealanders’ returns on overseas investments.

For example, over the year ending September 30, our dollar fell against Australia’s. That meant that while the return on the ASX gross index was a healthy 16.5 per cent, the gross return on smartOzzy was even better, at 25.6 per cent.

Note that I quoted gross returns, which include dividends, unlike the capital indexes you quoted. Gross returns more accurately show how investors have fared.

While we’re at it, over your June 30 to October 13, the return on the gross ASX 20 index was 3.6 per cent, says Chin.

And the gross return on smartOzzy, while still a loss because of the currency movements, was minus 5.1 per cent. The inclusion of dividends makes it somewhat better than your 7.6 per cent loss.

To sum up: In all share investments, don’t forget dividends. And in all international investments, don’t forget currency changes.

QWith the proposed changes to the Taxation (Annual Rates, Savings Investment and Miscellaneous Provisions) Bill being significant, I am extremely concerned that the select committee has decided that only a few selected people will be allowed to make further submissions to the Bill.

Even though managed fund investors are going to be treated much more harshly than direct investors under the proposed changes, they are not being given the opportunity to make further submissions.

A flood of submissions influenced the committee to drop the proposed tax on capital gains on foreign equities. Perhaps a further flood of letters/emails to Shane Jones, chairman of the Finance and Expenditure Committee — expressing grave concerns that the public isn’t being given the opportunity to make further submissions — will persuade the committee to alter its position.

Following the precedent of submissions made previously, perhaps each person might consider sending multiple emails affirming separately each reason they should be allowed to make further submissions.

In the interim people will have the opportunity to study the changes to the Bill, which I understand are to be drafted over the next two or three weeks.

AI don’t think you should assume that no managed fund investors will be asked to make submissions. The committee clerk did say they will ask a cross section of people.

Nonetheless, it does seem rather undemocratic for the committee to be considering such a drastic change from the earlier proposals and not to invite all and sundry to comment.

Perhaps if everyone emailed Jones, at [email protected], the committee would get the message.

While I feel sorry for the committee having to cope with so much in such a short time, I feel much sorrier for people who will be hurt by the changes and don’t have the chance to point that out.

QThe government’s proposed Fair Dividend Rate (FDR) is a misnomer. It is an unfair tax on offshore share investments.

To demonstrate, suppose an investor puts $1,000 in each of the share markets of New Zealand, Australia, Britain, and the USA. Each earns a total pre-tax return, made up of a capital gain and dividend, of $100.

We’ll assume the taxpayer is in the 39 per cent tax bracket.

At current dividend yields and tax rates the dividend and tax on each investment are:

  • New Zealand, dividend $48. The company pays tax at 33 per cent and, because of imputation, the investor pays just the remaining 6 per cent. So the tax is $2.88.
  • Australia, dividend $48. Tax at 39 per cent is $15.60.
  • UK, dividend $31. Tax at 39 per cent is $12.09.
  • US, dividend $17. Tax at 39 per cent is $6.63.

Despite lower dividend yields in the other countries, the NZ investor pays a higher tax on these dividends.

Under the proposed 5 per cent imputed dividend, the $1,000 investor would pay a tax of $19.50. On average this might be reduced to maybe $15 if the tax was forgiven during years when the investment suffered a negative return.

The commonly invoked argument that UK and US investments are tax advantaged because they pay lower dividends overlooks the considerable tax advantage that NZ share investments enjoy from dividend imputation credits.

The proposed “fair dividend rate” exacerbates an already unfair tax burden on non-Australasian share investments.

AYou make an excellent point.

Under dividend imputation, the tax that New Zealand shareholders pay on dividends is reduced by the tax already paid by a New Zealand company. Australia has a similar system.

The UK and US don’t have dividend imputation. Companies pay tax on their profits and shareholders also pay full tax on their dividends. The same money is taxed twice.

“Doesn’t our imputation already swing the balance towards New Zealand shares?”, I asked Inland Revenue’s David Carrigan, one of the people behind the proposed tax changes.

“It’s a philosophical question,” he replied. “The investor in New Zealand shares has already been taxed in New Zealand because the company pays the tax. It’s a debate who gets the credit for the tax the company has paid.”

Me: “But if I invest in, say, US shares, the company has already paid tax there too.”

Carrigan: “Foreign taxes don’t pay for our roads, schools and hospitals. The fact a New Zealand company has paid tax effectively means the shareholder has made a contribution to the upkeep of New Zealand.”

Hmmm. He, too, has a point.

Still, in light of the fact that many New Zealanders already invest too much in property or local shares and too little in overseas shares — from the point of view of lowering their risk through diversification — I’m unhappy to see any changes that would discourage overseas investment.

That has been one of my major concerns throughout the long debate about tax changes.

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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.