This article was published on 21 October 2017. Some information may be out of date.

Q&As

QI was really interested to learn at a recent seminar you ran that I will not necessarily lose all my money if my KiwiSaver provider goes bust — i.e. there is an independent body whose responsibility it is to make sure that my money is not held onto by the provider and that it is actually invested. So these investments are retained even if the company goes bankrupt.

Can you confirm that this is the same for other types of managed funds outside of KiwiSaver?

AI’ve gone one better and got the Financial Markets Authority to confirm it!

“All licensed managed investment scheme managers, whether for a KiwiSaver scheme or any other type of managed investment scheme, have to ensure that a scheme’s money and property are held at arm’s length by the independent supervisor of the scheme or a custodian approved by the supervisor,” says an FMA spokesman.

“This is for precisely the reason your correspondent has identified, that the investments are retained even if the company managing the money goes under.”

If your KiwiSaver provider went belly up, you would be transferred to another provider, with your money still intact. It would probably be put into a similar fund to the one you were in, and of course you would be told about that.

If you didn’t like that provider or that fund, you would be free to move at any time to a different provider or fund.

A lot of people don’t seem to realise this. It means that money in KiwiSaver and other managed funds is much safer than the money many people lost in finance companies in the recent past.

While the value of your investment will rise and fall when market prices change, it would be almost impossible for you to lose the lot. There would have to be massive fraud involving more than one company.

Do keep in mind, though, that the government doesn’t guarantee KiwiSaver or other managed funds — which is why I say “almost impossible”.

Investing is like riding in a car. If you don’t want to take any risk, don’t get into a car. But you won’t have a very interesting life.

Note, too, that just as some cars and drivers are riskier than others, investment risk varies. Managed funds — with their diversification and regulation — tend to be lower risk than directly investing in shares, bonds and other investments.

QI was wondering if you could say how much the New Zealand share market NXZ 50 is up this year (if any) if a2 Milk and Xero shares are excluded, as well as all dividends?

AThe S&P NZX50 capital index — the one without dividends — minus Xero and a2 Milk was up 7.3 per cent in 2017 at my deadline time. That compares to 13.5 per cent for the whole index including those companies, says the NZX.

A2 Milk has been the year’s biggest gainer, with its price more than tripling at 263 per cent. Xero’s price has almost exactly doubled. The other big gainers are: Synlait Milk, which has more than doubled at 135 per cent, Air NZ at 56 per cent, Fisher & Paykel Health at 47 per cent, and Restaurant Brands at 36 per cent.

But I’m doing some wondering, too — about what point you are wanting to make. There will always be top performers, mediocre performers, and losers. And nobody is consistently good at picking which shares will do what. That’s why it’s wise to invest in a wide range of shares, or do it through a low-fee share fund.

QLike the reader a couple of weeks ago, I too have more than doubled my money on shares excluding dividends, but perhaps by luck as the exchange rate versus the US dollar helped their profits, plus them winning a major overseas court case.

You see when I was at one employer I bought shares in the company each month to qualify for a one-for-two bonus share after three years. My boss changed so I left after two years and went to another company where I put my four weeks accrued annual leave money into their shares, as I had double pay that month, plus each month I spent the same amount on another company’s shares.

My first buy was at $4.60 per share and my last at $7.20 per share, to average $5.84 per share on my 3,300 shares when I left, as they were not my ideal workplace. Plus I took dividends as shares too, so I have even more shares at their latest sale price of $12.62.

So it can happen if in the right place at the right time. Not so much gain on the third company after their results in this year. But overall a great windfall as I only bought them for the dividends not the resulting capital gain.

AWell done, although you don’t say over what period your money has doubled. If it was over several decades, it would be nothing to write home about.

Your letter raises some other interesting points:

  • It seems you’ve taken advantage of employee share ownership schemes that give you favourable deals. That’s great — just as long as you don’t end up with a big chunk of your savings in the same company as your employment. If things turn bad for the company, you could lose your savings as well as your job.
  • It’s a good idea to reinvest your dividends in further shares, as you’ve done. Otherwise the money tends to be frittered away, and it can make a big difference to your investment.
  • You’ve invested in just three shares. That’s way better than one, but it’s still risky. I suggest investing in at least ten shares in different industries. If you can’t afford to do that, it’s better to be diversified in a low-fee share fund.

Other readers please note: Share prices don’t always rise like that. Good on you for acknowledging your luck. Many investors attribute their success to their wise choices, but there’s always luck too. Ask any unsuccessful investor!

QI have some comments to add to the discussion regarding the returns on shares vs residential property. I agree with your overall assessment, but I think the reason that many people instinctively believe differently is that it really has been a “tale of two cities”, or more precisely, Auckland and the rest of New Zealand.

I believe that the average house price in Auckland over the last 20 years has increased by approximately 6.3 per cent a year compounded, which when you add even a modest rental return (e.g. 2 per cent after expenses, excluding interest), makes it pretty similar to share market returns, with less volatility.

Even if you accept the pragmatic argument that most residential property investors have borrowing costs, whereas share market investors tend not to (not strictly a fair comparison of returns), in the case of Auckland, the effective after-tax cost of interest (i.e. assuming it is expensed at a marginal income tax rate of 30–33 per cent), based on average floating mortgage rates over that time, has been less than the rate of capital gain. So the more you borrow the higher your return on equity has been!

While in theory this trend cannot continue forever, or property would become infinitely expensive, it can and has done for the lifetime of many current day investors, particularly the baby boomers.

This has perhaps created a sense of overconfidence in the housing market, while on the other hand, people’s strongest memories of the share market are of the spectacular crashes, rather than the attractive long-term returns.

AI agree with most of what you say, although a 2 per cent rental return might be high given that the return is negative for many landlords.

We should note, though, that there have been several periods of falling house prices in the lifetime of boomers. And in Auckland we could well be in for another one.

However, as you say, people have more vivid memories of share market crashes than house price falls. With houses, it doesn’t all happen on one or two days, but gradually — house sale by house sale — over several months. And with shares, many owners panic and sell in a downturn, whereas most property owners sit tight. It’s harder to sell property. So a lot fewer people are immediately affected.

Also, of course shares tend to fall further than houses. But the very fact that property investors usually borrow while shares investors usually don’t raises property risk. While capital gains have exceeded borrowing costs over the long term for baby boomers, that hasn’t been true over some shorter periods. If the owner of a rental property is forced to sell when prices are down, they can be left with no property and a debt. That’s much worse than a share value falling to zero.

If you’re a highly geared recent investor in Auckland property, and your rental income doesn’t cover interest and expenses, I just hope you’re wealthy or the source of your other income is secure.

QI have one caveat regarding the rate of capital gain on properties. As far as I am aware, the measure of house price growth is not adjusted for the significant reinvestment that has gone into that market.

This is most prevalent in Auckland, where several of the more central suburbs that were once comprised of modest villas and bungalows, have been completely transformed over the last 20 years, at the cost of hundreds of thousands of dollars per property in many cases.

They are still the “same properties”, but to all intents and purposes, new houses in the original casings. That must have distorted the apparent returns to some extent.

AGood point, also made by another reader. People who talk — sometimes skite — about how much the value of their home or rental property has risen sometimes forget all the money that has gone into the investment in the meantime. Improvements can easily cost more than the original purchase.

When we assess investments in shares, or KiwiSaver or other managed funds, we need to subtract brokerage, fees and tax. But we don’t put in more money to improve the quality of the investment and then overlook that when we sell.

QMary, if your correspondents are thinking about moving to Whanganui they better hurry up.

It’s generally thought that there are less than 300 residential properties for sale, and while there are sections opening up, these need a house built.

But it’s all good in Whanganui — no traffic jams, lots to do, and jobs to employ people. Great climate. My neighbours moved from Titirangi 18 months ago, and can’t believe their good fortune.

ASounds like paradise. But if you and your friends write too many letters like this, demand for Whanganui houses will increase and prices will rise.

Next thing we’ll have Whanganui residents selling up and using their proceeds to buy in Raetihi.

No paywalls or ads — just generous people like you. All Kiwis deserve accurate, unbiased financial guidance. So let’s keep it free. Can you help? Every bit makes a difference.

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.