NZ Herald 26 June 2021

AOver the years I’ve heard many reluctant taxpayers argue that their money is going to government spending they don’t like. It’s too easy an argument.

Nobody will ever approve of every item in a government’s budget. But most of our tax money goes towards goods and services that we want.

If you don’t like what the government is doing, tell MPs or vote them out. Tax dodging is not an effective protest.

You’ve paid way more tax than most of us — because you’ve made more. Good on you. But please go back to picturing your money going into hospitals, highways, mental health and other good stuff. It probably is.

AIt’s far from a stupid question. In reply, here’s another question: How would you feel if your KiwiSaver account has a year or two of negative returns? Your debt is sitting there, and your savings are going backwards. What’s more, the mortgage interest rate could well rise over the next few years.

If your KiwiSaver fund has been earning about 10 per cent over any length of time, it must be in a middle to higher-risk fund — a balanced, growth or aggressive fund. Those funds invest largely in shares, and share values sometimes go down, as we saw in March 2020. What’s more, they don’t always recover as quickly as they did last year. Sometimes it takes several years.

Of course that won’t necessarily happen. Your strategy might work brilliantly. But if you plan to spend the KiwiSaver money within the next, say, ten years, I suggest you don’t take the risk.

An interesting point about your question is that many other readers who might say, “I would never do that!”, are sort of doing it. While you would be acquiring a mortgage to increase your savings, that would put you in the same place as people who are saving while they have a mortgage.

I’ve always said that those with a mortgage should contribute to KiwiSaver, because the government contributions — plus employer contributions for many — make it too good to miss.

But beyond that, I’ve suggested putting any extra savings into reducing your mortgage. Paying off a 6 per cent mortgage is equivalent to earning 6 per cent on an investment after fees and tax, and it’s risk-free. Not bad.

However, in the last few years readers have pointed out that doesn’t work so well with a 2 or 3 per cent loan. It’s a good point. In a low-interest environment, investing rather than paying down the mortgage might be worth doing under these conditions:

• You are happy in a higher-risk investment such as a growth or aggressive fund or a rental property. Only there are you likely to earn sufficiently high returns, on average, to clearly beat mortgage interest rates.
• You can tie up the money for ten years or more, to allow time for recovery from a major downturn.
• You won’t panic and reduce your risk in a downturn, cementing in your losses.
• You’re in a strong financial position, and can cope if mortgage interest rates rise.

If all that applies to you, go for it. And good luck.

AI can see where you’re coming from. And the Financial Markets Authority, which monitors KiwiSaver fees to make sure they are “not unreasonable”, has issued “guidance” on performance fees to address these issues.

For a start, the FMA says KiwiSaver fund managers that charge performance fees must set a “hurdle rate of return” using a benchmark based on a market index that matches the risk level of the fund. The managers have to earn more than the hurdle to get the performance fee.

But the managers don’t give investors a refund when they do badly. I suppose they could argue that they need a basic income — their ordinary non-performance-based fee — to keep the business running.

However, managers are expected to set a “high water mark”. This is the fund’s highest ever unit price or net asset value — the price you pay when investing in a fund.

If the fund performs poorly, and this price falls, the managers can’t receive a performance fee again until they have fully recovered from that drop. And the fee is based only on the extent to which they exceed the high water mark.

So in a way the fund managers are “punished” for performing badly. They’ve got to do really well next time to get back into performance-fee territory.

Still, I’m not keen on performance fees. As I said last week, they can encourage over-emphasis on the short term and overly risky investing. And the managers that charge them tend to receive relatively high ordinary fees anyway.

If a fund manager keeps performing well, that will attract more investors. The manager can get their reward from the ordinary fees they receive from these new investors.

I should add here that I hope readers of this column wouldn’t move to funds because they have performed well, as that might not continue. But there will always be unwise people who follow past performance!

AAnd guess which country is at the top, readers? Here’s how New Zealand ranks in the table:

• First for the house price-to-rent ratio — ahead of second-placed Canada. New Zealand’s ratio is more than twice its long-run average.
• First for the house price-to-income ratio — also ahead of Canada. New Zealand is nearly 70 per cent above its long-run average.
• First for nominal price growth, at 14.5 per cent — ahead of Sweden’s 13 per cent.
• First for real (inflation-adjusted) price growth, at 13.2 per cent — well ahead of the US’s 10.7 per cent.

What should we make of this? Perhaps, at the very least, that New Zealand’s house price madness can’t continue.

AGosh, those are big price rises — especially without explanation. So good on you for looking elsewhere. The more people who do that, the better service and prices we will all get.

You’re wise, too, to check about one-off deals. I suggest you ask the insurance companies that very question, in an email. You’ll then have their reply in writing.

You might also want to check the Insurance Provider Satisfaction Survey on the Consumer website. Consumer asked its members how happy they are with their company’s service for four types of insurance: house, contents and car; health; life; and travel.

Service from an insurance company is every bit as important as price.

AI suspect your tongue is firmly in your cheek. But still, you make an interesting point.

As it happens, last week’s correspondent snail mailed her letter to me because the couple haven’t got a computer. So they don’t seem likely to set up a Givealittle page, although I suppose a friend or relative could do it for them.

Anyway, I don’t like their chances of raising enough to replace a house. A February 2020 article says the two biggest campaigns on Givealittle in the previous five years raised $10.9 million for the Christchurch mosque shooting victims and $2.3 million to buy a beach in Abel Tasman National Park. But the third biggest campaign raised not much more than $400,000. The average New Zealand house price is now more than $900,000.

More on insurance next week.