This article was published on 16 November 2004. Some information may be out of date.

New share fund doesn’t need the hype

Naughty, naughty, NZX Funds Management! As a subsidiary of the stock exchange, you must know that it’s misleading to quote 12-month returns when selling a share fund. That’s way to short a period to judge any share investment.

It’s not surprising, though, that NZX chose to advertise in large letters that an index on which its new FONZ fund is based had a dividend yield of 6.4 per cent in the year ending September, plus share price growth of 18.4 per cent.

That’s impressive. But returns are highly unlikely to stay that high for long. I’m sure they won’t even stay as high as the 14.7 per cent (dividends and share growth) compounding return recorded from January 2001 until September 2004. An average annual return of around 7 to 10 per cent — with wide fluctuations, including considerable losses some years — is more realistic.

Despite the hype, though, I like FONZ for several reasons:

  • It’s an index fund, holding shares in the same proportion as in a share market index. That means it won’t hire managers to select which shares to hold, and will trade only when the index changes, all of which keeps fees down.

    Management fees will be 0.9 per cent a year for those with fewer than 2000 units, 0.75 per cent for 2000 to 400,000 units, and less above that.

  • Like all New Zealand index funds, it won’t have to pay tax on capital gains, which considerably boosts its returns compared with many non-index share funds.
  • It will be listed on the stock exchange, so it can be followed and traded easily.
  • The index it will track, the NZSX 50 Portfolio Index, covers basically New Zealand’s biggest 50 shares, so it includes a wide range of industries, and varied company sizes.

    Better still, no more than 5 per cent of the fund will be in any share — although there’ll be some leeway on that between quarterly reviews of the index.

    No company will dominate in the way that Telecom dominates many share funds. That domination is fine when Telecom has performed well. But when it doesn’t, the whole fund suffers markedly.

  • Dividends are automatically reinvested at no charge, unless you request otherwise. Over the years, this makes a big difference to how fast a share fund investment grows.

Investors can buy into FONZ either in the initial public offer (IPO), from November 15 to December 3, or on the sharemarket, probably starting from December 15. If you buy through the IPO (minimum $1,500), you pay a fee of 1 per cent. If you buy later, you will pay brokerage, which varies.

There’s one big advantage of going the IPO route. You can sign up for a regular savings plan, investing $50 or more a month, for a fee of just 25 cents a month.

Regular savings plans work well because, after a while, you don’t miss the money. Furthermore, you benefit from dollar cost averaging. By investing the same amount whatever is happening to the share market, you get more units when they are cheap and fewer when they are expensive. This brings down your average price.

Unfortunately, the NZX is offering the savings plan only to those who invest through the IPO. That’s a pity, as it puts pressure on potential investors to make their move in the next few weeks — at a time of year when many have lots else on their minds.

The manager does, however, reserve the right to open the plan again later. Here’s hoping that happens.

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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.