This article was published on 7 May 2016. Some information may be out of date.

Q&As

  • Thai retirement not so cheap
  • Buffett not unbalanced
  • 3 Q&As on investing in international index funds

QFor some reason I missed the article headlined “Retiring Abroad on $15k per year” when it first appeared on April 2, so I hope I’m not too late in replying with some inside information, as they say.

I am a New Zealand citizen and have been living in Thailand for almost 10 years, so I think I’ve got a good handle on the cost of living here. The writer of the letter would be living very frugally on NZ$15,000 a year. I would say more existing than living.

Health insurance cover is a necessity over here if you want “the best” treatment, although that is subjective. Also, there is a dual “system” of pricing in Thailand in which foreigners are charged a much higher rate than Thais, and that goes for anything from entrance to the zoo to healthcare.

In addition the typical Thai meal is packed with salt, MSG and sugar amongst other things, and can be very difficult for many foreigners to get used to, especially trying to eat it every day.

Many foreigners living here agree that you really need NZ$40,000 stashed away somewhere in case of emergencies, especially if involved in a road accident — which happens all too easily in a country which has no meaningful driving tests, pays scant regard to the condition of trucks, cars and motorcycles, and even allows 10-year-old children to drive!

In summary, one could get by on $15,000, especially in the north where poverty is the norm and one didn’t want the “finer things” in life. But it would hardly be the life that a hard-working Kiwi would want to retire into.

AIt’s probably good that you took a while to reply. It gave all of us dreamers a few more weeks in which to look forward to our fabulously cheap Thai retirement.

So it’s not so great? But you’re still there after ten years, so it can’t be all that bad.

QMany years ago I took your advice and read the book The Millionaire Next Door, which you wrote about last week. It left me dismayed. I could not see any benefit in having substantial resources and living in an average suburb, flying economy, driving a second-hand car etc.etc.

I am a conservative member of one of the professions you refer to in your article, but I still enjoy the fruits of my study and hard work and still live well within my means.

No doubt there are many Warren Buffetts around who are content to salt their investments away and get their enjoyment from reading their balance sheets while living frugally!

It’s not for me to judge, but there does not appear to be any balance (sorry about the pun) in their living.

AA couple of responses:

  • Perhaps the kind of people who live in an average suburb, fly economy and so on make better, friendlier neighbours than their wealthier counterparts.
  • From what I’ve read by and about Warren Buffett — one of the world’s richest people — he leads a full and happy life. He plays bridge and the ukulele and loves football. He’s also involved in politics — has endorsed Hillary Clinton — and has pledged to give away 99 per cent of his fortune to philanthropic causes. Doesn’t sound unbalanced to me.

Frugal doesn’t have to mean fun-free.

QIn the past you have been very positive about index tracker funds — mainly I believe because of their relatively low fees.

Smartshares do a large and increasing range of such funds. I notice that for the US index tracker funds, all Smartshares do is invest in an appropriate US fund run by Vanguard. And, of course, that means any investment is subject to Vanguard’s fees as well as those of Smartshares. (Smartshares do point this out in their literature).

Are you still enthusiastic about these funds? And, for example, for their US funds Smartshares management fee of 0.45 per cent seems extraordinarily high when all they’re doing is subsequently investing our funds in Vanguard funds?

A“Enthusiastic” might be a bit strong, but yes I prefer index funds because they charge lower fees than actively managed funds. I also think it’s a great idea to put a fair proportion of your long-term savings in international funds.

Last week we looked at why fees charged by Smartshares, the biggest provider of index funds in New Zealand, were a lot higher than fees on index funds in Australia and especially the US. This week — in this and the next two Q&As — we’ll look specifically at investing in US or global shares via Smartshares’ funds.

In these funds, as you point out, Smartshares simply invests New Zealanders’ money in funds run by the huge US index fund investor, Vanguard. For doing this, Smartshares charges 0.45 per cent plus a small Vanguard fee — for example 0.09 per cent on the US growth fund, which brings the total fee to 0.54 per cent.

I agree with you that the Smartshares’ fee seems high. But a Smartshares spokeswoman blames this on the small size of its funds, just as she did last week.

She adds, “Although there is in essence only one security in the fund, there are still a range of operating costs associated with the establishment and running of each fund here in New Zealand.”

Keep in mind that the fees on these funds are still considerably lower than on actively managed New Zealand-based funds that invest in US and international shares. And this can make a big difference, especially over long periods.

QWe are thinking about using Smartshares to buy US index tracker funds. Is it best to go through Smartshares (or another broker) or can we buy directly from Vanguard?

I am assuming that going direct will require a certain amount of faffing around with exchange rates and bank accounts etc?

AYes you can buy directly from Vanguard.

Through a local share broker you can invest in Vanguard Australia’s exchange traded funds (ETFs), which are listed on the Australian stock exchange. Or — if you have at least $500,000 to invest and an Australian bank account — you can go into an unlisted international share fund via Vanguard Australia, a spokesman says.

The fees are much below Smartshares fees. For example, Vanguard Australia charges 0.05 per cent on its US Total Market Shares Index ETF.

However, as you suspect, it’s more complicated than buying locally.

In Smartshares, “Investors can buy and sell in NZ dollars, with dividends received in NZ dollars, rather than having to worry about foreign currency accounts and transactions,” says the spokeswoman.

“They can contact someone in New Zealand if they have any questions, and see the prices of the funds in the New Zealand newspapers. Investors can also participate in the Smartshares Regular Savings Plan and a Dividend Reinvestment Plan.” By comparison, Vanguard Australia has no regular savings facility. And dividend reinvestment is available on only some funds.

Then there’s tax. “All Smartshares funds are designed as PIE funds (Portfolio Investment Entities), which caps the tax payable on distributions at 28 per cent, and US tax is handled within the fund rather than an investor having to do that separately.

“An investor should also consider other costs of investing offshore. These include custody charges, international brokerage rates, foreign exchange conversion margins, and tax,” says Smartshares.

In other words, investing directly with Vanguard is indeed “faffier”. Is it worth it to get the lower fees? I asked authorised financial adviser and Herald columnist Brent Sheather.

“Our view is that those people who want to keep things really simple should use Smartshares, and people with substantial sums like $100,000 or more to invest overseas should access Vanguard via their Australian stock exchange or US listed ETFs,” he says.

He adds that while Smarthshares is simpler taxwise, the tax situation may not be particularly good if you’re investing in international share funds. This is too complicated to go into here. Ask your tax adviser. But in any case, tax probably shouldn’t drive your choice. Governments change taxes.

QI am considering investing in a Vanguard S&P500 index fund.

I am trying to decide whether it is best to invest in Vanguard directly or via the NZX’s Smartshares’ USF fund. Investing via Smartshares would mean higher fees, but would be simpler.

However, I am concerned about getting my money out one day. I cannot find information on how many and how regularly USF units are traded on the market (rather than bought directly from Smartshares), and how the market price compares with the unit price then charged by Smartshares for new units.

If I want to invest in an S&P500 index fund, is the USF’s liquidity risk significant? What sort of a sell discount should I expect?

AA note to other readers: This is quite technical stuff. If your eyes glaze over as you read this, jump to the last two paragraphs.

Says the Smartshares spokeswoman, “There has been more than $90 million, and hundreds of trades, in on-market trading so far this year across the Smartshares ETFs, including more than $10 million trading in the USF fund.

“The on-market spreads have also narrowed significantly. As an example the market buy/sell spreads can be as low as 0.07 per cent on our fixed income funds.”

Asked how the market price compares with the unit price charged by Smartshares for new units, she says: “Smartshares publishes the NTA (Net Tangible Assets) of each fund daily. The NTA is basically the value of a unit in a fund, based on the closing prices of all the shares that make up the fund.

“When an investor applies directly to Smartshares, they will receive units at the NTA price at the end of month. If an individual purchases on market they can elect when they would like to buy and at what price, although they can use the daily NTA price Smartshares publishes as a reference.

“There will be a spread on market from demand and supply pressures and this spread will vary between funds. However, typically, the spread is relatively narrow in relation to the NTA, and investors will be able to see this spread on nzx.com, or through their broker.

Meanwhile, across the Tasman, “Withdrawing funds, or selling units, in Vanguard Australia ETFs is facilitated by Vanguard’s ability to create and redeem ETF units on a daily basis,” says the spokesman.

“This ensures the primary underlying depth of liquidity. Secondary sources of liquidity exist in the volume of trading of the ETF itself and the investment environment it is trading in.”

Got that? Well I hope our correspondent has, but other readers shouldn’t worry too much if all this is over your head. For long-term savers, these aren’t make or break issues. If you have a relatively small amount to invest, Smartshares is the simplest and probably the best way to go.

As Brent Sheather says, “index funds are used by institutions around the world, and the important things like diversification and fees get a big tick.”

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.