Few companies have been harder hit by the pandemic than Auckland Airport. Photo / Richard Maher
COMMENT:
Q: I saw in the news that Auckland Airport is issuing a release of shares and that it is likely to be the first of many companies trying to raise capital in this economic climate.
We have about $100,000 sitting in the bank left over from the sale of a property. We are mortgage-free and in our mid-50s, with reasonably secure jobs. Apart from our KiwiSaver funds we have no shares and have no idea about how to go about buying some.
I know that you usually recommend buying into a fund with a balance of shares. But this seems to be a unique opportunity to both support the recovery of our country and buy into established companies at the same time.
A: Sorry, but you're not eligible to buy the shares. Only current shareholders can take part in the share purchase plan.
But that's probably a good thing. I applaud your desire to help New Zealand companies cope with Covid-19 — and few companies will be harder hit than Auckland Airport. But you're right, I always recommend starting in shares by investing in a share fund.
Why? There's a saying in financial circles that there's no such thing as a free lunch. If you want to reduce your risk, you have to accept a lower average return. But there's one exception, which applies if you invest in a wide range of shares, either directly or in a share fund.
You reduce your risk because not all the shares will fall, or go out of business, together.
But you get the same average return as you would if you bought just one share.
Some interesting research quoted by financial advisory firm Bloomsbury Associates looked at the NZX50 share index and the 50 shares that make up the index, in the 10 years ending April 2019. They found:
• Only 26 per cent of the companies had higher returns than the index, while 74 per cent — nearly three quarters — had lower returns. What's more, 14 per cent made losses over that decade.
• Only one out of the 50 companies had lower volatility than the index. One!
That tells us there's only a one in four chance of buying an individual share that performs better than the index. And it will almost certainly be more volatile than the index. As we're learning lately, volatility can be hard to cope with.
I'm not saying that eligible people shouldn't buy the Auckland Airport shares, especially as they are being offered at a discount. They might end up being a great investment for people who already hold a wide range of shares.
But for you starting out in shares, I think drip feeding into a low-fee non-KiwiSaver index fund over a few months would work best. There's more on index funds, which simply invest in all the shares in a market index, below.
Q: I've been a bit concerned by the rise of Facebook groups and Reddit threads of newbie (and experienced) investors asking things like, "What do you think about XYZ stock?"
It seems that the market drop is resulting in a surge of people thinking they will be great stock pickers, and there is easy money to be made based simply on the fact a company's stock price has gone down. The tone has been shifting from investment to trading/speculating.
It is a big concern, especially because there will be many short-term stories of quick 20 per cent, 30 per cent, or 50 per cent returns by people speculating on individual stocks, which draws others in. But this completely ignores the purpose of investing and is no reflection of their ability to deliver over the long term.
A: That is indeed a worry. The people who do well tend to crow about it. The others slink away.
Time and again it's proven that most people don't do well out of short-term share speculation. Unless you enjoy a gamble with a tiny portion of your savings, give it a miss.
Q: I thought you might like some more positive news. I have had my KiwiSaver in Milford's Active Growth fund for several years. Like others, no doubt, I was worried about the Covid-19 effect on global markets.
I'd like to put in a plug for Milford, as it adopted defensive strategies in February, got out of investments that would likely fall, and into others that might rise. The end result is my KiwiSaver is only down 10.5 per cent from January 1.
And I am 69 years old and happy to stay in the workforce for a few more years still.
A: It's a sign of the times that you're content with a 10 per cent drop in your KiwiSaver balance. But positivity is great.
Without knocking what you say, a few other funds have actually performed better, including at least one index fund.
This is of note because managers of actively managed funds, such as yours, like to point out that they can make moves to reduce losses before a market falls, whereas managers of index funds are stuck, unable to take defensive action. That means, the argument goes, that index funds perform worse in downturns.
But it seems most active managers aren't actually that good at picking what to do when. Or perhaps they're just too big.
"It's worth noting that the increasing challenge for active managers in New Zealand is that they are now running quite large funds, and this makes it harder and harder to implement their strategies and to also react," says Dean Anderson, founder and chief executive of Kernel, an investment platform and index-fund manager.
"If you've got a billion-dollar fund and the market starts to fall, you can't just turn 40 per cent of it into cash easily."
So how has Anderson's Kernel NZ 20 Index fund performed lately? For the three months ending March 31, that fund's return was minus 10.36 per cent after fees and before tax, according to Morningstar NZ.
That compares with your fund's minus 13.11 per cent over the same period — despite the fact that your fund includes some non-share investments that were probably less affected by the downturn. (Your 10.5 per cent number is different, perhaps, because you're including gains since March 31.)
Anderson adds that only one out of 15 active New Zealand share funds beat his index fund in the period. The average active-fund manager's return was minus 13.6 per cent after fees and before tax. What's more, Kernel's commercial property index fund beat all its active-fund competitors.
This isn't a one-off. After the other significant New Zealand share downturn in the past few years, in October 2018, index-fund manager Smartshares said, "Only two of the 19 New Zealand active equity funds beat the market, according to Morningstar, but all of our funds did."
Similar stories come from overseas. Right on deadline for this column I received a press release that starts, "This year's market sell-off has triggered the worst underperformance for active-fund managers against passive funds in years, according to the latest survey of 1350 funds with assets totalling $4 trillion by Copley Fund Research."
The upshot of all this? I've always recommended index funds — aka passive funds — because they are cheaper to run so their fees are lower. And over time their average returns after fees tend to be among the best. A few active managers might beat them, but nobody can pick which ones in advance.
I think we can conclude that index funds are the best bet in falling markets as well as the more common growing markets.
Q: Because I am relatively close to retirement, some time ago I changed my company super scheme to a preservation (100 per cent cash) fund with Fisher Funds. So I was not unduly alarmed at the recent fall in equities.
However, on checking my account I was surprised to find that there had been a fall over the month; not huge but puzzling given that the fund is supposed to preserve the capital.
I questioned Fisher Funds and got an answer about unit prices fluctuating, which did not really answer my question.
What I cannot understand is how a cash fund can fall.
And if it does, why not just leave the money in a bank term deposit where there would be no fluctuations?
A: You got it slightly wrong about the 100 per cent cash. Fisher Funds' Preservation Fund holds only 30 per cent cash and cash equivalents — securities that will mature in less than 90 days, says chief investment officer Frank Jasper. The rest is New Zealand fixed-interest investments.
"All of the investments are securities rated A minus or better with a portfolio average rating of AA minus," says Jasper. Many of them are issued by banks.
Most of the time these investments won't lose value — or not so you would notice.
However, "The Preservation Fund dropped in value by 0.28 per cent in March," says Jasper.
"While it is very unusual for cash and short-maturity fixed-interest investments to fall in value, it can happen in extreme circumstances.
"We are living through extreme times and extreme levels of market volatility. The uncertain outlook in March meant investors demanded higher than normal returns to take on even modest risks.
"In a cash and fixed-interest portfolio, that resulted in wider credit spreads, the extra return demanded for lending to anyone other than the government, leading to higher overall interest rates."
Got all that? The main point is that when interest rates rise, the value of fixed-interest investments falls — and with it the unit prices in your fund.
So why not, as you suggest, just use a bank term deposit?
"Over time, a portfolio made up of cash and short maturity fixed-income investments, like the Preservation Fund, is likely to deliver a return in line with bank term deposits — although returns will fluctuate month to month, quarter to quarter," says Jasper.
But there are advantages over a bank term deposit:
• Diversification. Your fund invests in "a range of different entities including the NZ Government, banks and supranationals. While we would hope that the benefits of this diversification are never needed it's a good thing to have," says Jasper.
• Tax. The fund is a portfolio investment entity (PIE), with a maximum tax rate of 28 per cent.
• Flexibility. Over-65s can withdraw money usually within a day or two, whereas term deposits are locked in.
Perhaps "Preservation" is the wrong name for the fund, but it seems to be pretty low-risk.
A Fisher Funds spokesperson adds, "Please pass on our apologies that the answer our team gave wasn't adequate. I have followed up with our client-facing teams on this."
- Mary Holm 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 mary@maryholm.com. 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.
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