Look beyond the dividends
In share fund investing, keep your eye on the prize — the over-all return, not just the fees and dividends.
My last column was about returns on AMP’s World Index Fund, or WiNZ, which plunged earlier this decade but are coming right. “Don’t bail out”, I advised a worried reader.
This brought the following response from a Christchurch WiNZ investor:
“It seems to me that fees are killing this investment.
“My recent distribution shows that the management fee was 29.96 per cent of the gross distribution. I would have thought that fees for an index fund would be much less than this.
“I am still holding, since December 1998, and am not quite square.”
What he’s done wrong is to relate fees to dividend payments, when in fact fees on share funds are calculated on the market value of each investors’ units.
For WiNZ investments of less than $500,000, the fee is 0.7 per cent, with a minimum of $3 a month. This is considerably lower than fees on non-index share funds, known as active funds, which cost much more to run.
In addition, if you choose to have your dividends reinvested in WiNZ, you pay 1 per cent of the amount reinvested, minimum $2. But this is hardly big bikkies, and I recommend dividend reinvestment, for two reasons:
- It helps your investment grow.
- Dividends paid by WiNZ, or any other international share fund, are so low that, unless you have a really big investment in the fund, dividends aren’t worth doing anything else with.
New Zealand companies tend to pay some of the biggest dividends in the world, followed by Australian companies. This is partly for tax reasons, partly historical reasons.
Whatever the cause, it doesn’t matter much. When a company makes a profit, it pays some out in dividends and keeps some to invest in its growth. All things being equal, companies that pay higher dividends grow more slowly, so their share price also grows more slowly.
The companies in which WiNZ invests pay much lower dividends than New Zealanders are used to — often not much more than WiNZ fees. But, generally, we expect share price growth — and hence WiNZ unit price growth — to be higher. That’s where the action is.
Unfortunately, as we’ve said, international shares had a terrible run in August 2000 to February 2003. Our Christchurch man has been on a roller coaster — a super 20 months from December 1998, then a shocking 30 months, and good gains since.
Indeed, in the 12 months to September 2006, WiNZ grew 19 per cent after tax and fees. If he looks at total recent performance — not just dividends — relative to fees, he should be pretty happy.
Of course there’s no guarantee such growth will continue. But over ten or preferably twenty years, average annual returns are likely to be healthy.
MEANINGFUL CHRISTMAS GIFTS
If you’re struggling to think of Christmas presents for people who already have much more than they need, how about giving presents, on their behalf, to people who don’t?
You can “buy”, say, some plants or school books through Oxfam or World Vision. They will send the items overseas to people who need them, and send you a card describing the gift, which you can pass on to your friend or relative.
For more info:
- Ring Oxfam on 0800 400 666 for a catalogue, or order via www.oxfamunwrapped.org.nz
- Ring World Vision on 0800 245 000 for a catalogue, or order via www.giftsofhope.org.nz
No paywalls or ads — just generous people like you. All Kiwis deserve accurate, unbiased financial guidance. So let’s keep it free. Can you help? Every bit makes a difference.
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.