ASB gives warning to small investors

One of the country's largest fund managers has hit out at finance company deposits, saying they pose an unnecessary risk for small investors.

ASB Group Investments head Rob de Luca said New Zealanders had invested more than $8 billion with finance companies at rates of up to 10 per cent - believing their money was secured and their returns were safe.

"The reality is that neither of these things [is] true. Investors put their money with finance companies, seduced by the phrase 'first ranking secured deposits', but in many cases their money is anything but safe."

He said the money was frequently lent on to highly geared property developers or as high-risk personal loans to people unable to borrow from traditional sources.

Investors were not getting the appropriate compensation for the risk.

ASB Group Investments is New Zealand's third-largest fund manager, with more than $5.3 billion under management.

Although in competition with finance companies, "the reality is if one of these guys falls over it's bad for the whole investment sector, not just for them", a company spokesman said.

"We're more concerned that investors do the right thing and no one gets burned."

ASB's analysis of finance company reports showed many were earning weighted average interest margins of between 15 per cent and 40 per cent from their investments, but were paying investors' much lower rates, at between 9 per cent and 10 per cent in return.

"The ironic thing is if someone offered investors a return of 40 per cent they would automatically think the risks were too great.

"But investors aren't necessarily getting the return for that risk or maybe aren't aware of the risk they're actually taking," said De Luca.

Finance companies have had a dream run during the past few years on the back of a rising property market and periods of robust economic growth.

But concern has been mounting about what will happen if the economy and the property market hit the skids.

Yesterday, De Luca was urging caution:

"We've gone through a reasonably strong cycle in the investment space and property space, and we expect that to be a bit more subdued going forward ... we expect to see some issues," he said.

"We're saying to investors - be careful, speak to credit advisers when you look at an investment and really understand what you're investing in. Don't be fooled by the topline rate."

Finance companies came under the spotlight last September when the Securities Commission warned many were not keeping investors informed about the risks they faced - with some not meeting the minimum legal requirements.

That was based on an analysis of 30 companies' disclosure statements and was a precursor to a full report on the state of the industry.

The commission's report, released in April, said finance companies should improve their disclosure to investors.

Areas singled out for attention and improvement included: risk disclosure, principal risks, company activities, related party lending and the use of rating information and other disclosure issues.

A follow-up review of finance companies' disclosure statements this year will focus on documentation, with the commission looking to see if companies have improved their practices.