KEY POINTS:
Financially literate visitors to New Zealand may be almost as astonished by the interest rates paid to savers as they are by the scenery. New Zealand has some of the highest rates in the world, and whenever they rise, the benefit to investors is often overlooked as the plight of borrowers grabs the headlines.
High rates are particularly welcome for investors looking for predictable, low-risk returns.
Shanta McPherson, head of portfolio services operation at investment bank and stockbroker Forsyth Barr, says New Zealand rates have been consistently higher than in many of this country's trading partners.
Investors probably do not realise how well served they are by interest rates, he says.
Banks have been competing heavily with rates on shorter terms, mainly one-year fixed-term deposits. But McPherson says that with interest rates likely to be near their peak in the current rate cycle, it is time to consider fixing for three to five years.
Options would include government bonds, which have very high levels of creditworthiness, and also corporate and local authority bonds.
Investors not familiar with buying bonds might not appreciate that because they are traded, in the same way that shares are, their value can alter from day to day. But if investors hold the bond to maturity, they will know what will be repaid on maturity date. Interest on a bond will be fixed over its life, so investors can calculate the yield by comparing the return with their purchase price.
"You can buy a good quality bond for a very handsome yield," McPherson says.
James Scarr, managing director of Staples Rodway Asset Management, also likes bonds and also thinks the cycle is turning. "Our view is that short-term interest rates, which are very high, are not likely to stay at these levels forever."
Ninety-day rates are likely to be lower in 12 months' time and in two years, says Scarr, could be under 6 per cent.
The firm is encouraging investors to consider corporate bonds with maturity dates of five years. There are five-year bonds available with double-A ratings from Standard & Poor's that yield 8.2 per cent or more. These include bonds listed on the New Zealand market from ANZ and BNZ.
"Anything over 8 per cent on bank bonds is a no-brainer," says Scarr. Investors might want to compare the rates on bank fixed-term deposits with those on bank bonds. Three- to five-year returns on bonds have been a little higher recently than rates available on bank fixed-term deposits over similar periods. Scarr says that bank rates may have to rise, however, as a result of the recent tightening in the availability of funds to lend.
Investors need to buy bonds through a broker or adviser. Interest is paid quarterly or half yearly, depending on the bond.
If overseas visitors are surprised by the interest rates on offer to investors in New Zealand from banks and on the bond market, they may also be surprised by the popularity of fixed-interest investments with finance companies, most of which are small institutions by international standards. Newcomers will be even more perplexed if they have picked up on the news about finance company collapses.
In many cases, the rates offered by these companies are not significantly higher than those available from the mainstream banks. The Consumers' Institute says there has been a trend among finance companies to reduce their rates to appear less risky compared with banks.
Many investors hit by the collapses have bought through financial advisers but some advisers, including Staples Rodway, rarely, if ever, recommend finance companies. This is generally because of the general absence of internationally recognised credit ratings or enough other information to assess the strength of the organisations.
The Consumers' Institute suggests a do-it-yourself system for assessing risk. Say you think there's an 80 per cent chance, after a year, of getting paid the 10 per cent you were promised on a $100 investment, and a 20 per cent chance of getting nothing back, not even your capital. The investment has an expected ("weighted average") value in one year's time of (0.8 x $110) + (0.2 x $0). In other words, only $88. So the investment has an expected return of - 12 per cent. Even if the expected return on a risky investment is close to that of a good old bank deposit - not lower, as in the above example - you need to ask yourself whether the extra risk involved is worthwhile.
If you have savings as well as borrowings, paying off debt may be the best risk-free return available. Mortgage broker Auckland Home Loans reminds clients in its latest newsletter: "It makes more sense to pay off your loan or any high interest debt such as credit cards and hire purchases than to have it sitting in a low interest rate savings account."
* Maria Scott is a Christchurch journalist who specialises in personal finance.
