KiwiSaver for the whanau?

QSome feel good news — On the IRD unclaimed monies page I found a reasonable sum under my deceased mother’s distinctive name. My mother died in 1997 so we are lucky the government hasn’t benefitted.

While IRD process the claim, I can consider my options. After sharing half with my sister, I would like to give grandchildren and great grandchildren — ages 40 years to 4 months — $500 each.

In line with my mother’s conservative approach to money I had considered KiwiSaver, as no one is in their own home yet. Is this best, even for Mr 4 months, or would another fund that is easier to access be better? Will the money not get eroded by management fees if no more income is added for a few years?

AIt’s been a long time since I heard anyone warning us not to count our chickens before they hatch, but it’s great advice.

A friend of mine found his parents listed in the Unclaimed Money page on Inland Revenue’s website — which readers can find here. As in your case, the parents died some time ago, and so far my friend has been unable to get the documentation to prove he has a right to the money. It’s not enough to just say, “That’s my parent.”

Still, it doesn’t hurt to think about what you might do with the money if it comes through. So, should it be KiwiSaver or a non-KiwiSaver fund?

Firstly, the young ones would need to be in a fund, which must be opened by the parents or guardians. If they don’t have KiwiSaver accounts, you might want to suggest they are set up. It’s good for children to know about the concept, and to perhaps start saving for a first home in their teens.

On fees eroding balances, that shouldn’t happen. If the young ones are in higher-risk funds — which I recommend if they are more than ten years away from spending the money — there will be years when their balance falls, and fees will still be deducted. But over time the returns should well outweigh the fees, especially if they are in low-fee funds.

What about non-KiwiSaver funds? They would be more suitable if their parents think the money should be used for, say, education costs. Discuss this with the parents — or the recipients if they are adults.

One final point: Have you thought about equal treatment for great grandchildren yet to be born? Maybe you could set aside money for this and, if it proves to be too little, just put in $500 yourself for the last ones. While we’re not talking large amounts per person, it can still be sad the way unequal treatment in a family can cause upset.

Are these ads OK?

QIn last weekend’s Herald, both Milford Asset Management and Generate had ads regarding their 10-year annual returns. (Cunningly, or by chance, Generate had its ad the same size and on the back of Milford’s. This meant if anyone cut out and gave the ad to someone else, they got both ads!)

The two ads said very much the same thing, but in different ways.

I am an investor in Milford’s active growth fund, which has offered very good returns over the last 10 years.

I suspect both ads are not fully truthful. Milford’s ad compares itself to “other providers surveyed”, yet omits Generate’s returns if Generate’s ad is correct. In Generate’s case, I’m not sure it has been in business ten years? Also, it is essentially claiming the same thing as Milford.

Is this misleading or even false advertising on someone’s part?

AGood on you for being skeptical around financial ads. But in this case the info in the ads is correct — even if I disagree with their message, which we’ll look at in a minute.

But first, why are you — and quite possibly many other readers — confused?

Both providers’ ads refer to how well some of their KiwiSaver funds have performed in the recent Morningstar rankings of returns after fees and before tax. The ads look only at the longest-term data, over ten years, which is to be commended. Shorter-term returns mean very little.

Milford trumpets its first places in three of the five Morningstar fund categories, conservative, balanced and growth. Over the page, Generate trumpets its first places in the other two categories, moderate — which comes between conservative and balanced on the risk scale — and aggressive, the top risk category.

So how did each provider’s other funds — the ones that didn’t come first over the decade — perform?

In Milford’s case, their moderate and aggressive funds haven’t been around for ten years. But over three years they both topped the returns.

In Generate’s case, their growth fund came second to Milford’s growth fund. Their conservative and balanced funds have only one-year data, and in both cases they came fourth.

It’s fair to say, then, that Milford has had an excellent run across all these types of funds. And Generate has also performed impressively.

On your other concerns, Generate has been running KiwiSaver funds since April 2013. And I’m sure neither advertiser was able to specify the placement of their ad relative to the placement of their rival’s ad.

So why don’t I like the basic idea of these ads? The messages are clearly suggesting readers move their money to the winning funds. And why would anyone do that? I can’t think of any other reason than hoping the funds will continue to perform well.

True, Milford points out, in reasonable-sized type, “Past performance is not a reliable indicator of future performance,” and Generate runs a similar message, although the type is tiny.

But they are simply following the rules. Says the Financial Markets Authority in a guidance note: “Advertisements that disclose past performance should include a prominent warning statement that past performance is not a reliable indicator of future performance.”

Incidentally, the FMA guidance also states, “The past performance of a financial product should not be the most prominent feature of an advertisement.” Hmmm.

It adds, “Overemphasis on performance history, or stating that a product has a good performance history without qualification, may:

  • result in an unrealistic expectation that high returns will continue into the future; and
  • distract investors from other important information such as fees and risks.”

Why all this concern about ads about returns? The great performance may not continue.

I’ve seen several pieces of research that show many top-performing funds over a decade perform poorly in the following decade. Maybe their distinctive style of investing, which proved lucky for one period, proved unlucky next time around. Or maybe the brilliant managers have moved on to other jobs. Or … who knows?

The uncertainty about future returns is why I always suggest people choose a fund largely on the basis of low fees.

Morningstar itself — the source of the info in the Milford and Generate ads — says prominently in the report they quote:

“Please note:

  • “Past performance is not a guide to future performance. This year’s best performers can easily be next year’s worst.
  • “Understanding your risk profile, and the mix of growth and income assets is critical.
  • “Fees are the one constant that will always eat away at your returns. Take a close look at the cost of your KiwiSaver Scheme.” Yep!

Neither Generate nor Milford challenges the accuracy of anything I’ve said here.

Generate CEO Henry Tongue comments, “The main question KiwiSaver members ask us is ‘how has my fund been performing against all other KiwiSaver funds?’… This is a good question to ask. In Australia, the regulator ASIC asked the worst performing super funds to send a letter to their 1.1 million members suggesting that they consider moving their money into a different superannuation product.”

I’ve noted often before that it makes sense to reject funds that have performed particularly badly over the long term. Just don’t embrace the winners!

Tongue adds, “The drive for lower fees has seen most large bank KiwiSaver schemes go to lower cost passive management. By definition they are now locked into investing in listed indexes. They should not consider investments in unlisted investments — potentially meaning members miss out on higher returns from unlisted investment, and NZ Inc misses out on investment from those KiwiSaver funds. Both Generate and Milford make unlisted investments.”

This is a fair point. But not all low-fee KiwiSaver providers offer only index funds. Members can also invest some of their savings in relatively low-fee funds with unlisted investments — which, I should add, tend to be higher risk and are therefore suitable only for more sophisticated investors.

Concludes Tongue, “We’ll keep investing in our investment team to give us the best opportunity to top the tables again over the next 10 years.” They may succeed. And they may not.

At Milford, Murray Harris, head of KiwiSaver and distribution, says, “You’ll note that we did not include the actual fund percentage returns in the advert. This was a conscious decision to avoid any expectations that those will be the fund returns in the future.”

He adds, “No one can predict the future. However, at Milford we are very proud of our long-term track record and are confident in our ability to continue providing consistently strong results over the medium to long term. This is due to our large specialist team of 38 analysts and fund managers actively managing and choosing our funds’ investments every day. It’s a lot of hard work, not luck.”

Also, says Harris, every Milford staff member must invest in Milford funds. “It’s a bit like a pilot, who is highly motivated to ensure their plane and passengers get back on the ground safely!”

He adds, “We would consider manager track record to be an important part” of KiwiSaver provider choice. “Think of it a bit like supporting the All Blacks. They won’t win every game, but they have one of the best long-term track records, and you’d back them to consistently be in the top few teams in the world.”

Sounds reasonable. But longtime readers will know I sometimes comment about how fund management is not like sports or the arts or many other fields of endeavour, in which past performance is often a good indicator of future performance. I maintain — backed by much research — that that’s not true in investing.

Wow — this is one of the longest Q&As ever in this column. But it’s a very important issue.

KiwiSaver tax take

QCould you please explain why my contribution to KiwiSaver isn’t taxed, but my employer’s contribution is taxed?

AI can see why you think that. But employee contributions are taxed.

Say you earn $100,000. Your employer must send Inland Revenue PAYE tax of about $24,000, so if you’re not in KiwiSaver you take home $76,000.

However, in KiwiSaver, your 3 per cent contribution of $3,000 comes out of your after-tax pay. So you take home $73,000.

Keep at that mortgage?

QI’m currently overpaying my mortgage as I’m locked in on a low interest rate (3 per cent) until 2025. My thought was to hit it hard while I can make good inroads into the principal, with debt reduction always being rammed down as the best form of saving!

I’m a public servant, and worried I might be made redundant. Should I reduce my repayments so I can save more, or just keep going as it will benefit me in the long run?

AGosh, you did well, tying up that low mortgage rate to last through the high-rate period.

But while paying down debt is always good, in your situation it would probably be wiser to invest the extra money in, say, a bank term deposit, for two reasons:

  • Paying down a 3 per cent mortgage improves your wealth as much as an investment that earns 3 per cent after tax. Meanwhile, a 6 per cent 6-month term deposit would give you 3.66 per cent after tax in the top tax bracket, and more if your tax is lower.
  • If you lose your job, it will be easy to get the money in a term deposit, once it matures.

Having said that, your mortgage lender would probably let you access that money if you needed to, by adding it back to your mortgage. If you really want to stick to your current plan, you could ask the lender now if that would be possible.

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Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former 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.