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COMMENT:
Q: My wife and I have a large amount of money in an account with one of the major banks. The current uncertainty has us worried. We are aware that there is a possibility of a "haircut" if a bank is in trouble, and there is currently no government guarantee for any money in cash accounts or term deposits.
To safeguard our money, we have recently opened several conservative or cash investment funds at different institutions, like Milford, Simplicity, ASB Bank and Kiwibank, with at this time only small amounts.
Our intention is to transfer our money from the current bank account into these funds if it becomes apparent that the main banks are getting into trouble.
Can the Government or the banks access money in these investment funds under the Open Bank Resolution? Or are the funds safe from Government intervention?
A: It seems counterintuitive, but — if these things worry you — keeping money in a cash fund is arguably safer than in a bank account or term deposit. In a conservative fund, though, the comparison is more complicated.
We're talking here about cash and conservative Portfolio Investment Entities or PIEs, run by banks and other financial institutions. Some are KiwiSaver funds, others are not.
There are several other ways to make our risk comparisons:
Volatility of investments
Cash funds are at the lowest risk level, and most hold only bank deposits or similar instruments.
Conservative funds are the next step up the risk ladder. "A conservative fund would almost certainly be riskier than a bank deposit because it may have growth assets, such as ... equities (shares), usually around 20 to 30 per cent," says an FMA spokesperson.
"It may also include properties, commodities and other assets as well. While this creates the potential for greater return, it also increases the risk of loss."
However, the bulk of a conservative fund's investments are still lower risk — cash, bonds and the like.
Haircut risk
PIEs, whether or not they are run by banks, are not subject to Open Bank Resolution (OBR), under which depositors in a "distressed" bank could lose a portion of their money. The Reserve Bank confirms this.
However, the bank deposits held by PIEs could suffer an OBR haircut. Cash funds, in particular, hold mainly "haircuttable" assets.
Check whether a fund has most of its investments with one bank, which clearly raises the haircut risk. And don't assume Bank X's cash fund holds only Bank X deposits. Some hold investments from a wide range of banks, and their own bank isn't necessarily dominant.
Note that a non-bank cash fund is just as susceptible to this risk.
Conservative funds tend to hold fewer bank investments, so they are actually less vulnerable to this risk.
You can check a fund's investments on the Smart Investor or KiwiSaver Fund Finder tools on sorted.org.nz.
Provider default
This is the risk that the company running a cash or conservative fund goes belly up.
"Managed investment schemes (MISs), including cash funds and conservative funds, are not prudentially regulated, but their managers are licensed by the FMA, are regulated for conduct and are overseen directly by supervisors (who also are licensed by the FMA)," says the spokesperson.
"While there are no minimum capital requirements for funds, MIS managers are required to operate in the best interests of investors, and supervisors are required to do the same."
The investments made by the funds are held in custody, "so they are not at risk of loss in the event of failure of the MIS manager, supervisor, or custodian", he says. If the provider defaults, your investments would be transferred to another provider. And if you didn't like that provider, you could move elsewhere.
Could this go wrong? Nothing's impossible, but it seems highly unlikely given the several levels of scrutiny.
Bank credit ratings
International agencies assess the likelihood a bank will get into financial trouble, and give it a rating. Ratings are not infallible, but pretty good.
You can check the banks' ratings on the Bank Financial Strength Dashboard on the Reserve Bank website, rbnz.govt.nz. There are three ratings agencies, but broadly, ANZ, ASB, BNZ, Kiwibank and Westpac are rated about equally, with other banks getting lower ratings.
You might also want to keep an eye on the ratings of the main bank investments in your cash or conservative fund. "A cash fund may have the benefit of diversification across multiple banks, but may have lower overall credit ratings than any particular bank," says the FMA spokesperson.
Inflation risk
In a bank deposit or a cash fund, "there is a risk that your money won't grow as fast as the cost of living (inflation risk)," says the FMA.
Conservative funds are the winners on this measure. While their share and property values are volatile, over time they grow more than inflation.
Inroads made by fees
At first this seems simple. Cash and conservative funds charge fees, but bank deposits don't.
But the FMA notes, "This can make it more difficult to compare funds with term deposits, as funds are required to advertise returns after fees and tax, whereas term deposits advertise gross (before-tax) returns."
How are you doing? Too much to get your head around?
Here's the FMA's conclusion: "As a general rule: if you are looking to mitigate investment risk, spread your money across different cash investments, including funds and savings accounts. There is an inherent risk in all investments and none is government guaranteed, whether it's bank deposits or cash funds."
What it all boils down to is good old diversification — the investor's friend.
Footnote: Accessibility might matter to you. With non-KiwiSaver cash and conservative funds, you can usually get your money in a few days, whereas term deposits are tied up.
However, if you are over 65 or you don't expect to spend the money until you reach NZ Super age, I suggest you favour KiwiSaver funds over other funds. The fees are sometimes lower, and the funds are probably watched more closely. Note that over-65s can now join KiwiSaver at any time.
The letter above concerns me, as do several other readers' letters about what investments would be affected by OBR. We'll look at this more next week. But please, everyone, stop panicking about the health of NZ banks. Says a Reserve Bank spokesperson: "New Zealand's financial system is sound, with strong capital and liquidity buffers. The Reserve Bank has been in constant communication with ... retail banks and the New Zealand Bankers' Association, and we are confident that they are well placed to respond to the impacts of coronavirus."
Q: I am a 34-year-old male and I have been in KiwiSaver for about 12 years. I'm looking to buy my first house in the next five to 10 years. I have a balance of about $60,000. My current provider is one of the banks.
I have been talking to another provider that obviously wants me to join it. It has told me its great annual return figures, better than the banks' returns (ranked No 2 out of 35 providers, etc).
What are the implications and risks of going with another provider? What happens if this company were to go bust while I had my money with it? What are the things to consider and be wary of when selecting a KiwiSaver provider?
A: Please don't be attracted by good returns in the past. They don't really tell us anything about how a provider will do in the future.
A while back I was looking at KiwiSaver returns. There were 11 conservative funds that had been around for at least 10 years. The best performer over one year came 10th out of 11 over 10 years. Meanwhile, of the four aggressive funds, the best one-year performer was the worst 10-year performer. Return rankings are all over the place.
On the safety of KiwiSaver providers, see the "provider default" section in the Q&A above.
There's plenty of monitoring. While there are no guarantees, let's put it this way: I'm happy to invest with a smaller KiwiSaver provider.
The best way to choose a provider is to find one with low fees and good services to investors. The KiwiSaver Fund Finder will help you with both.
- 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 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.
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