This article was published on 25 April 2020. Some information may be out of date.

QI’m guilty of a panic decision, woe is me! I’m 67 and my wife is 58 and I will probably stop working in 12 months. We are mortgage-free, debt-free and both of us are still employed and in good shape. My wife intends to continue working until at least 65, job market permitting. My wife is not bothered with the state of her Kiwi Saver Moderate fund and is content to continue as is.

With my retirement pending, in the middle of last year I sought the advice of a Westpac financial adviser, which resulted in the Moderate Fund being selected. I recently watched my balance plummet. I desperately sought advice from Westpac, who told me that a financial adviser would not be available for the next week or so and suggested I do a risk profile exercise, which pointed me to the Conservative or Cash Fund.

I transferred everything to the Cash Fund but still felt very uneasy. So I cashed up and reinvested $140,000 in term deposits with a 2.8 per cent per annum return, locked in for six months.

In six months if the market stabilises I’ll go back to KiwiSaver and invest what I plan to spend within three years into the Conservative Fund and put the remainder into the Moderate Fund. I have a bad feeling I should have done this instead of cashing in. Your thoughts please.

Also, your recent 11 April article mentioned the NZX50 index has regained more than 40 per cent of what it lost from late February to late March. If only to punish myself, is there a NZX50 index site that graphs the state of the share market, which we can look at to see what’s happening?

AAccording to the Oxford dictionary, a 1659 collection of English proverbs included “No weeping for shed milk”. These days we cry rather than weep, and the milk is spilt rather than shed. But the meaning hasn’t changed. Take note of it.

What’s more, you’re not just cleaning up the mess, you’re obviously learning from your mistake. So no more beating yourself up, okay!

One of the main things you, and a whole lot of others, have learnt recently is that you’re not good at coping with a falling sharemarket. I’m hoping, though, that you and your nervous mates also learn over the next year or two that the long-term market trend is upwards, and it’s best to ride out a downturn.

However, you’ll probably never be one for higher-risk funds. So your plan to put your longer-term savings into a moderate fund is sound.

When should you move back? You say after six months “if the market stabilises”. But how will you know? We all tend to assume whatever has been happening lately will probably continue, and that’s fair enough with many trends. But not share prices.

I suggest that, regardless of what’s been happening, you move your savings back into KiwiSaver in, say, three steps money — a third in six months, a third maybe a month later and a third two months later. That avoids moving it all at what turns out to have been a particularly bad time. But don’t muck around for too long. Get in there for the higher long-term growth than in term deposits.

On your last paragraph, here’s the deal. If I tell you where you can watch the progress of the New Zealand and world sharemarkets, do you promise you won’t try to time your re-entry to KiwiSaver, or any other investment moves? I hope every other reader makes a similar promise.

Okay, here’s where to find the graphs:

You can look at different periods. “YTD” — year to date — is a good period to see what’s been going on under Covid-19.

For others wanting to check their risk profile, go to the KiwiSaver Fund Finder on and click on “Find the right type of fund for you.”

QLetter from the stock exchange, NZX:

After seeing last week’s Q&A about more investors asking about shares on social media platforms, we thought you might like to see some interesting data.

Graph showing weekly number of trades split by buys and sells

More retail investors are buying shares than retail investors are selling shares. This shows a net inflow into retail investment portfolios.

Historically, we have seen strong retail to retail sales of equities. Since the introduction of new participants and initiatives that have made the market more accessible to retail investors, we are really pleased to see strong continued growth in retail to retail sales. In the first quarter of 2020, retail to retail sales increased 43 per cent from the same period last year.

ABig jump. Clearly more New Zealanders are suddenly taking an interest in the share market.

Why are more individuals buying than selling? I asked NZX. “We don’t have any visibility into the individuals, but an unverified theory could be that those buying are holding as an investment.”

But every trade needs a buyer and a seller. So who has been selling more than buying? Wholesale investors, buying for an organization rather than for their own personal account. They include KiwiSaver and other managed fund providers, pensions and so on.

That doesn’t mean there’s been a huge selling rush from wholesale investors, though.

“Retail investors typically trade in much smaller amounts than institutional investors,” says an NZX spokesperson. “So it wouldn’t necessarily mean there is any large selling activity from somewhere else.”

QMy question is regarding the declaration for the Covid-19 wage subsidy for people whose income has dropped. Can you please find out from MSD what they mean by the sentence in the declaration regarding drawing on cash reserves as appropriate.

It reads:, “before making your application for the subsidy, you have taken active steps to mitigate the impact of COVID-19 on your business activities (including but not limited to engaging with your bank, drawing on your cash reserves as appropriate, making an insurance claim).”

Do they want self employed to use up their personal savings before applying for the subsidy? It seems as though most applicants are ignoring this request.

AFair question. Jayne Russell, MSD’s group general manager employment responds:

“Applicants for the wage subsidy should take active steps to mitigate the impact of Covid-19 on their business activities. We would expect applicants who have significant cash reserves to have considered using these before applying for the wage subsidy.”

But many small business owners may not have money labelled “cash reserves”.

Adds Russell, “For a self-employed person who does not have a clear separation between their business and personal finances, it may be that considering personal finances is appropriate, especially where they had planned to spend that money on their business.

“We expect people in this situation to assess what are cash reserves for their business and whether using them would be appropriate in their particular situation in order to apply in good faith.”

It seems you don’t have to have cleaned every last penny out of every personal account before applying.

QI know you recommend index funds for their low fees and generally superior performance.

However, with Covid-19 expected to bring many business failures in tourism, hospitality, aviation etc would you still recommend index tracking funds for investors with some spare cash to put into the share market?

Or do actively managed funds actually offer an advantage at this time in being able to predict sectors in trouble and avoid them?

AYes to your first question, and no to your second one.

Managers of active share funds — in and out of KiwiSaver — select which shares to hold, and when to buy and sell them, while managers of index funds simply buy all the shares in a market index, such as the NZX50.

Index funds — sometimes called passive funds — are much cheaper to run, and therefore charge lower fees. This helps them to perform better than most active funds after fees, over the long term.

But, as you say, active managers can choose to avoid certain industries.

The trouble is that by the time a manager realizes prospects for an industry have deteriorated, it’s probably too late.

Picture the managers of a whole lot of NZ active share funds, which until recently probably had considerable holdings in tourism, hospitality and aviation shares because that’s where a lot of the growth was.

At the very first word about the discovery of Covid-19 in China, maybe one or two of those managers predicted the trouble to come, and quickly sold some of their shares in those industries — although selling in a hurry they may not have got great prices for them.

Other managers would have seen the price falling, and perhaps rushed to sell their shares — but at increasingly lower prices.

Since then, the New Zealand and world share markets have been rebounding. Last I looked world shares were halfway back to their February high, and local shares were more than halfway back.

That seems weird when the economic outlook is bleak. But perhaps share sellers overreacted in early and mid-March. Or perhaps we’re in for more falls. Nobody knows. We do know, though, that some time in the not too distant future shares will be back on their long-term growth path.

And at some point, many active managers will find themselves buying back some of those shares they sold — quite possibly at higher prices than they sold for. That’s not a winning strategy — especially when you consider trading costs.

There’ll be other shares they stay out of — possibly including some that later do a surprise phoenix performance, and the managers miss out on dramatic gains.

Meanwhile, index fund managers, with no choice, have just kept holding the shares right through — apart from making what are usually relatively minor changes when their index changes, usually once a quarter.

I’m not saying no active managers would have handled the turbulence well. Of course some have. But will they always be the winners?

Remember that investing in shares or a share fund is a ten-year-plus proposition. It’s too risky to put shorter-term money in shares, because you can lose money over short periods — as we’ve seen lately.

So let’s look at ten-year performance. Quite a lot of active share funds do so poorly they don’t last ten years. Others do well some years, badly in other years. And there are usually a few that shine.

But there are at least three reasons why they might not stay at the top:

  • Their star stock pickers are enticed away to other funds. And we don’t know they’ve gone.
  • The fund attracts many investors and becomes too big. As Dean Anderson of Kernel said last week, “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.”
  • The managers might have taken more risk than most funds — which works well sometimes and badly sometimes.

Very long-term studies show the winning funds in one decade often perform poorly in the following decade.

Even if one fund keeps outperforming, how do you know in advance which one? It’s a better bet to go with a low-fee index fund, regardless of what’s happening to the markets at any time.

QRe your column last Saturday, how can Smartshares “beat” the market? They are index funds less fees.

AGood point. If an index fund holds the shares in a market index, it should perform the same as that index, but a bit worse because of fees — albeit low fees.

And yet last week I quoted someone from Smartshares — the largest New Zealand-based manager of passive funds — as saying in a magazine interview that in the October 2018 market downturn, “Only two of the 19 NZ active equity (share) funds beat the market, according to Morningstar, but all of our funds did.”

Actually, he forgot that one of Smartshares’ five NZ share funds, its Top 10 fund, didn’t do so well, dropping a bit more than the average active fund in that quarter. More on that fund in a minute.

But to your point about beating the market. In New Zealand, “the market” is usually regarded as the NZX50 index, which includes basically the 50 biggest shares.

But no Smartshares’ index fund is based on that index. The Top 10 fund holds just the biggest ten shares, the High Dividend fund holds 25 shares that pay higher dividends, and so on.

The one closest to the NZX50 is the NZX Top 50 fund, but it’s based on the Portfolio Index. This caps each share at 5 per cent of the index, whereas the main index is based on “market capitalisation” — the total value of each company’s shares. So a really big company has a really big weighting. For example, Fisher & Paykel Healthcare and a2 Milk currently make up about a quarter of the index between them.

As it turned out, in the 2018 downturn all the indexes used in Smartshares funds — except the Top 10 mentioned above — performed better than the NZX50 index. Hence last week’s quote.

That’s not always the case of course. In the recent downturn — in the month and year ending March 31 — most of Smartshares’ NZ share funds performed worse than the NZX50, and worse than most active funds. Oddly enough, though, the very one that did worse in 2018, the Top 10 fund, was easily the best performing NZ share fund in the year ending 31 March 2020, and second best in the month of March.

What’s more, “Smartshares US Large Growth ETF was the best performing fund out of all 685 managed funds in New Zealand over the last one year and three years to 31 March 2020,” says a spokesperson. “Despite the drop in markets this fund returned 16.64 per cent net of fees over the 12 months to 31 March, and 16.07 per cent a year over the last 3 years.”

So what’s going on here? In market downturns, some index funds do well and some don’t. Ditto for active funds. The main point is that active fund managers have long said, “Index funds are all very well, but wait for a downturn.” Here we are in a downturn, and some index funds are more than holding their own.

QJust like most people have strong political biases, I think most investors have strong style biases. Yours is passive, mine is not.

With that declared I feel it was not fair to hold up Kernel NZ20 as an outperforming passive fund when discussing KiwiSaver and recent performance — as you did last week. I’m not even sure if it is a KiwiSaver option. But if it is, it is a very high risk one compared to a diversified portfolio like Milford.

The Kernel NZ20 fund has 35 per cent of its portfolio in two stocks! And those two stocks have done pretty well in a tough time.

Further you are right to say that most active managers don’t outperform the index. But I believe in seeking out the ones that do over a long time period. But that’s my bias. And I’ve enjoyed watching how different styles and managers handled the ructions.

My question though, to a passive fan, is what do you think of the idea that market cap indexes are the worst way to construct an index, and other options like fundamental indexes or equally weighted indexes achieve better returns?

ANot sure I accept that my preference for passive funds is a bias. It arises simply from decades of watching.

No, Kernel NZ20 is not a KiwiSaver fund, although I don’t think that affects anything. And yes, it is a higher-risk investment than Milford’s Active Growth Fund, because the latter includes some lower-risk assets such as bonds. But as I pointed out last week, you would therefore expect the Milford fund to be less affected by the share market drop, but that wasn’t the case.

You’re right that the Kernel fund benefitted from the strong performance of F&P Healthcare and a2 Milk. That’s because that fund’s index is another one based on market capitalisation — like the NZX50 described above.

Which leads to your question about market “cap” indexes. I asked Dean Anderson of Kernel why he used such an index. “The beauty of market cap indices is their true reflection of the market. As companies do well, they grow in value and shift up the index, as they do worse they become a smaller part of the index and eventually drop out. Ultimately, when you invest in a market cap index fund you are buying the market, or part thereof.”

I agree to some extent. But when just a few companies dominate an index, that can be worrying. If they do badly, the fund probably will too. Personally, I prefer a fund based on an index like the Portfolio index, also described above. Its 5 per cent cap prevents such dominance.

Good luck with finding active managers that keep performing well. They are rare.

QIs now a bad time to consider changing KiwiSaver providers? I have been meaning to change for a while (after some financial advice) and now that I have the time to do some research I feel confident in a change. But I don’t want to consolidate any losses. So should I hold off or go ahead with the change?

Hope all is well in your bubble!

AAny time is a fine time to switch provider. If you move to a fund with the same risk, losses are not an issue. If you sell low, you then buy low.

But if you want to raise or reduce your risk at the same time, I suggest you first move to a same-risk fund, and then gradually change your risk level a bit at a time — as described in today’s first Q&A.

This is a good time for everyone to review their KiwiSaver settings. It could make a big difference in the long term. I wrote about how to do it a few weeks ago.

Oh, and yes, I’m bubbling along fine thanks — and loving the way most people are friendlier than usual. Let’s keep that going long after this crisis is over.

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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.