This article was published on 5 April 2014. Some information may be out of date.

Q&As

  • How to tell if an investment — beyond low-risk KiwiSaver funds — is fairly safe
  • Should woman sell rental and enjoy the proceeds?
  • Can reader use Dad’s KiwiSaver for own benefit?
  • Lenders may help with first home deposit timing problem

QI am often asked, by younger friends especially, “How did you differentiate ten years ago between (say):

  • Milford Asset Management and Ross Asset Management?
  • UDC Finance and Hanover Finance (or more topically, South Canterbury Finance)?”

…you get the idea.

Personally, I read and re-read the short-form investment statements, checked longer-term performance — in spite of assurances that “past performance is no guarantee of future earnings, etc…” (is there any research on this?), and diversified within reason — but was it really just luck?

The names clearly sound so similar that they provide no basis at all for the layman to differentiate. And I suspect this is a significant reason why so many place their faith — and savings — in conservative funds (and KiwiSaver default providers), to their immense long-term detriment.

Karyn Scherer wrote an interesting piece on this in ‘The Business’ in 2007, one of the few to include a clear table listing the meaning of various analysts’ ratings (Moody’s, S&P, Fitch, Rapid Ratings).

It seems to me that you are well positioned to revive and update the topic, if it sparks your interest, Mary. So how would you go about sorting the wheat from the chaff in the current climate?

AOne big help is the credit ratings you refer to — which apply to some investments. The ratings are set by international agencies that study investments and companies in some depth. They give would-be investors a pretty good feel for how strong an investment is.

Our table shows what the ratings mean. (See tinyurl.com/cratings). Note that a B rating is nothing like getting a B on an assignment at school. If an investment has a B rating, that means it has a one-in-five chance of defaulting. Gulp.

While we should always take note of credit ratings, they can be misleading, as we saw in the global financial crisis when some highly rated investments defaulted. Also, many investments don’t have credit ratings.

So how else can you tell if an investment is solid? There’s often analysis done by experts, and a good authorised financial adviser (AFA) should be able to use that analysis. Also, shorter and clearer investment information coming soon will make investment info more accessible to the lay person.

Still, many people won’t feel competent to make judgements. What’s the best way for them to invest — more or less safely — beyond conservative KiwiSaver funds, which are highly likely to grow more slowly than riskier alternatives?

My suggestion — keeping things simple — is to invest in higher-risk KiwiSaver funds. They give wide diversification and tend to be monitored by government more closely than other investments. But how can you be comfortable that they are safe?

Firstly — and importantly — you cannot be sure the value of your savings won’t go down. The opposite is true. If you’re in a riskier fund, it will invest in shares and possibly property and other investments, and their values fluctuate all the time. Still, as long as you have ten or more years before you plan to spend the money, you’ll probably end up with quite a lot more than in a conservative fund.

Turning to other possible issues, what if a provider goes out of business? This shouldn’t actually be a problem for KiwiSaver members. You’re not investing in the provider. You’re just “hiring” the provider — through the fees you pay — to invest your money in a wide range of investments including shares, bonds, property and so on.

If the provider is no longer able to run its business, your KiwiSaver account will be transferred to another provider. And if you don’t like the new one, you’re free to switch to someone else.

But what if a provider doesn’t actually invest in what they say they’re investing in?

“It’s one of the roles of the licensed trustee — a separate company from the provider — to monitor what investments are made by the manager. Managers themselves will also be soon subject to a licensing regime,” says a spokeswoman for the Financial Markets Authority (FMA).

“Trustees, as frontline supervisors, must ensure that the actual investment strategies of those managing KiwiSaver schemes are aligned with the investment policies and objectives that are stated in the disclosure documentation provided to KiwiSaver members.”

She adds that the FMA expects trustees “to make the monitoring of KiwiSaver scheme investment risk management a priority.

“If a fund is labelled low-risk or medium-risk by a provider, then the investment policies and objectives of the fund must reflect that risk category.

“Managers have to follow the investment policies and objectives when selecting investments for their fund. And, as frontline supervisors, trustees have to monitor, on a regular basis, that this is being done and that managers are not investing in assets that are inappropriate for a fund’s risk category.

“Trustees also have the power to refuse to buy or sell certain assets of a scheme if it is not in the best interests of the scheme’s members, or it breaches the trust deed,” says the spokeswoman.

Sounds good, although everyone should always keep in mind that no investment is failsafe.

Some final points:

  • For help in choosing the best risk level and KiwiSaver fund for you, see the KiwiSaver Fund Finder on www.sorted.org.nz
  • You can help FMA monitor KiwiSaver funds. “If investors feel their fund is not investing in the assets they expect, or were disclosed, they can contact FMA and ask us to look into the issue,” says the spokeswoman. See www.fma.govt.nz/about-us/contact-us/
  • The downside of putting lots of savings into KiwiSaver is that you lose access to the money until you reach NZ Super age, unless you use it to buy a first home. If that’s a concern, you might want to invest in a non-KiwiSaver fund run by your KiwiSaver provider. They are usually pretty similar to the KiwiSaver funds, but with ready access to your money.
  • And harking back to the start of your letter, yes, there’s heaps of research that shows past performance is no guarantee of future performance. If anything, some research suggests that past high performers tend to perform worse than average next time around.

QI am a 56-year-old woman with a 2 bedroom, high maintenance (character bungalow) rental property in a very good inner city suburb of Auckland. I bought the property in 1999 for approximately $300,000. The RV is now in the vicinity of $900,000.

It is currently rented for $450 week and has an $80,000 mortgage on it. Most of the rental income goes on the mortgage, rates, insurances, property maintenance and management fees etc.

I am very lucky to be in this position, but cannot decide when is the best time to sell and access this money. Having recently been made redundant, I am tempted to sell, put the money in the bank or use some of it to buy another property in the city where we live, and be mortgage-free and retire early. I am very aware that once it is sold, it is sold and gone forever.

Do you think I should hold on to the property a few more years in the assumption that that Auckland market will continue to rise?

AWhat are you waiting for? If you can be mortgage-free and retire early — and that appeals to you — why not do it? As they say, “if you don’t travel first class, your kids will!”

Sure, the value of the rental property might keep rising. But it also might fall. Or your health might deteriorate. Or — perish the thought — you might be hit by a bus. If you’re in a financially strong enough position to do what you want to do at this stage of your life, go for it.

By the way, it’s interesting that with a mortgage as small as $80,000, you’re still using up most of your rental income on mortgage payments and other expenses. It makes me wonder how on earth a landlord would manage these days with a big mortgage.

QIs it possible to use someone else’s KiwiSaver scheme for your own benefit?

My father is self-employed and nearing retirement, but does not wish to join KiwiSaver as he prefers to do his own investing. Is there anything to preclude me from putting in the money on his behalf and receiving the benefit at the end? Provided he consents of course.

I looked in the KiwiSaver Act and couldn’t find anything against this.

AThere’s nothing to stop anyone from putting money into someone else’s KiwiSaver account. But only your father will be able to open the account, and withdraw the money at the other end.

Still, if he’s willing to give the money to lucky you, that’s his choice.

QI work at Westpac and have some advice you could give to the house buyer who wrote last week about KiwiSaver money not being available to pay the initial deposit to the real estate agent — as opposed to the deposit paid to the seller on settlement date.

If all their deposit is in their KiwiSaver and they have no cash, they need to do two things.

First negotiate with the agent/vendor to reduce the deposit on signing the contract to as low as possible, as it doesn’t need to be 10 per cent. It could be only $5000 or less if the vendor is agreeable.

Second let the bank know your situation. We can generally advance some of the mortgage funds early when the contract goes unconditional. We go up to 10 per cent, but prefer less as we don’t have any security at the stage.

The advance is normally an overdraft or personal loan, which is repaid at settlement from the mortgage drawdown. The interest rate is the same as normal unsecured lending, but as it is for only one month generally, the benefit outweighs the cost.

AThis sounds like a good fallback position for a first home buyer who has put all their house savings into KiwiSaver.

Clearly, it would be simpler — and would save paying interest — if they had money elsewhere to pay the agent’s deposit and other expenses. But your suggestions sound good for those in a difficult situation.

It’s a good idea to negotiate with the agent anyway. If you’re not being paid interest on your deposit — and especially if the settlement date is more than a couple of weeks away — it’s worthwhile to keep as much money as possible in your bank earning interest.

On whether Westpac will advance some mortgage money, a spokesman says, “Lenders can certainly discuss the option of a personal loan or overdraft as a means to pay a deposit on a property purchase.” Unsurprisingly, though, he adds that it would depend on the customer’s circumstances.

I’m sure other lenders would also consider such a loan. Thanks for writing.

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.