This article was published on 25 October 2008. Some information may be out of date.

Same rules for big and little savers

There’s plenty for Joe and Joanne Saver to learn from two recent news items about the NZ Superannuation Fund, sometimes called the Cullen Fund. In short:

  • The fund has copped ridiculous criticism for its recent results. It should, instead, be congratulated. The loss tells us it has the right investment strategy. If you, too, have seen your long-term savings lose value lately, you should also be praised.
  • The National Party has said that, if it wins the election, it would aim to get the fund to invest at least 40 per cent of its money in New Zealand. That’s bad policy — just as it would be if you put lots of your long-term savings in local assets.

The Cullen Fund was set up five years ago to help pay for Baby Boomers’ NZ Super payments, starting in about 15 years.

It recently reported a loss of nearly 5 per cent in the year ended June 30. Given that about 80 per cent of its money is in shares, property and other “growth assets”, most of which have done anything but grow this year, the loss seems quite mild — although it doesn’t include the last couple of tumultuous months.

Rather than complain about the loss, I as a taxpayer would object if the fund invested more conservatively. Over long periods growth assets tend to easily outperform more conservative income assets, such as bonds.

In the case of the Cullen Fund, we need look back no further than a couple of years. In the year ending June 2007, the fund grew 15 per cent, and in the year before 19 per cent. Over all, its performance has been comfortably better than its objective.

But the price for higher average returns is volatility. There’ll be bad years and the occasional ghastly one, such as so far in 2008. History shows, though, that for Cullen Fund and individual long-term investors alike, it’s worth gritting your teeth and sticking with growth assets.

Turning to National’s push for more New Zealand assets in the Cullen Fund, various objections have been raised:

  • The growing fund could quickly become too big a player in this country, with its purchases and sales heavily influencing prices. That’s not an issue for Joe and Joanne Saver.
  • Political parties could push for the fund to invest in their pet projects, which may be poor investments. Again, that’s not J and J’s territory — but the next two points are.
  • If the Cullen Fund, or Joe and Joanne, limit where they can invest, they almost certainly won’t get as high returns as if they or their fund managers can pick from the whole world.
  • If an investor of any size holds international assets, they get much wider diversification, which reduces risk in a couple of ways.

Firstly, when investments do poorly in some countries, they often do well in others. In an extreme case, if our economy is struck down by foot and mouth disease or a major earthquake or eruption, we’ll thank our lucky stars if most of the Cullen Fund — and most of our own savings — are overseas.

Also, offshore investors get some protection from the effects of a fluctuating New Zealand dollar.

When our dollar falls, that pushes up the price of imports and overseas travel. But the value of overseas investments also rises, making it easier to pay for the expensive imports and travel.

And when our dollar rises, the opposite happens. The value of offshore investments falls, but investors are not too worried, as imports and travel are cheaper than they would otherwise have been.

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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.