Overseas markets offer diversification - and sometimes excitement too. Photo / AP
COMMENT:
Q: I set up my share portfolio starting about eight years ago, mainly in Smartshares. It is very diversified, with overseas stocks, after reading books advocating diversification out of New Zealand, as New Zealand is just a rounding error on the world markets. Now I regret taking that advice. The NZX50 is persistently ahead of my portfolio in returns.
In hairy hindsight, I wish I'd put a lot more into the New Zealand market — that is, the NZX50 and Mid Cap funds. I'd be running at about 15 per cent for returns instead of 11 to 12 per cent.
I understand that all markets around the world have periods as the star performer, but this is a sustained period for New Zealand.
Do you think the NZX50 is going to revert to the mean or continue to beat world markets on a sustained basis? I'm just trying to figure out whether it's too late to start investing more in New Zealand, and where to put any further new investment going forward. Is this surge due to the advent of KiwiSaver, a2 Milk, Ryman, etc, or other factors?
A: I don't know. I've read various theories on why the New Zealand market has had such a good run lately, but how does anyone really know? Do they survey every buyer and seller of shares?
What I do know is that in the long run it's better to invest around the world. In fact, I'm probably one of the authors who have annoyed you on that issue. And I know you've read my latest book, Rich Enough? A Laid-back Guide for Every Kiwi, because you made kind comments about it in a postscript. Perhaps you're really saying, "Hey, you shouldn't have said that", but you've put it more politely!
Anyway, there's no denying that if you had invested locally rather than globally since the 2008 global financial crisis, you would have done better, as our graph shows.
But what if we were now in the late 1990s — at the height of the tech bubble that hugely boosted world shares but not New Zealand shares? At that point, you would have been glad to be in world shares.
And then look what happened.
I'm not saying New Zealand shares will plunge. But given how well they've performed for several years, it wouldn't be surprising if the growth at least slows. The graph shows that rapid rises — including in New Zealand in the 1980s and early this century — are often followed by substantial downturns. The long-term trends are upwards, but with big wobbles.
There's nothing wrong with having, say, a quarter of your share investments in New Zealand. You benefit from dividend imputation, and many people like the idea of investing locally.
But with world shares you get much broader diversification of industries and exposure to a range of economies. That's where I've got most of my long-term savings.
Q: Recently I received an email from the ANZ informing me that I would need to top up my KiwiSaver account to meet the yearly threshold to get the government contribution. I had been away for a six-month holiday, so it was nice of the ANZ to let me know.
However, the payments from my wage slips are far higher than what shows on my ANZ KiwiSaver transaction report. I called the ANZ, which told me that the IRD can and does hold payments for up to three months before releasing them to the bank. Is this legal? And why does it do this?
A: Before we get to your questions, let's clarify for others that the government contribution — formerly called a tax credit — is based on all the money deducted from an employee's pay during the KiwiSaver year, which runs from July 1, 2018 to June 30, 2019. It also includes any money you pay directly to your provider in that period.
You get 50c for every dollar you contribute, up to a maximum of $521 if you contribute $1042 or more. Even if you put in $1, the government would give you 50c. The money comes into your KiwiSaver account in July or August.
And, yes, it's great when your provider points out that you might miss the maximum government contribution.
Who might that apply to? If you earn more than $34,762 a year, and have contributed 3 per cent of your pay or more throughout the year, you will have contributed more than $1042. But the following might not have:
• Employees on less than $34,762 a year.
• Employees who have contributed for only part of the July-to-June year.
• Employees on a contributions holiday.
• Non-employees and the self-employed.
If that includes you, I suggest you check your total contributions and if necessary top up. If you can't afford it, put in what you can. Remember, this gets you free government money.
To top up, send the money directly to your provider, preferably by mid-June to give them time to process your deposit. To contact your provider, see tinyurl.com/KSproviders. If you don't know who your provider is, ring 0800 KiwiSaver. You'll need your IRD number.
Okay, on to your questions. Yes, it's legal. But why does it take up to three months for payments to clear Inland Revenue?
After your employer deducts the money from your pay, it sends it to the IRD by the 20th of the following month. Then the IRD checks the information — which can take a month or more — and then transfers the money to your KiwiSaver provider. While your money is with the IRD, it earns 0.91 per cent interest. It's not much, but it all helps.
The long process is "simply because the KiwiSaver payments are part of the normal payroll cycle", says the IRD on its website. For more on this see tinyurl.com/KScontribs
How can you keep track of your contributions, including the money sitting in the IRD?
"A member can log in to their My KiwiSaver account to see the total amount that has been deducted from their salary and wages and received by the IRD," says a spokesperson. My KiwiSaver is on the top right side of the home page at KiwiSaver.govt.nz.
However, he adds, "Any amount that has been deducted from their pay but not yet received by the IRD will not be visible in MyKiwiSaver."
That sounds worrying, but it's taken care of. "In some cases a scheme provider may claim the government contribution for a member before all of the member's contributions for the year have been received by the IRD, meaning that the IRD will initially pay less than the maximum of member contribution to the provider," says the spokesperson.
"However, as additional contributions are received by the IRD this triggers an automatic recalculation of the government contribution and, where appropriate, an additional government contribution payment."
If all this sounds too complicated, make a rough guess at how much you need to top up, and then add a bit extra. If you put in more than $1042, it's still your money, so it can't be all bad.
The process should get easier soon.
"Once the processing of employee contribution information is passed into the IRD's new START platform (proposed for April 2020), members will be able to see a much more up-to-date picture of contribution flows from their employer and across to their scheme provider," says the IRD.
"The information should be able to show deductions from a member's pay within approximately 10 days of the member's payday, rather than 6-8 weeks under the current system." Phew!
Q: I'm a young professional whose parents are divorcing. I have no properties or assets in my name.
As part of the dissolution agreement, my father intends to gift a part of his half share of their property to me in two years' time. Would this affect my eligibility to withdraw my KiwiSaver funds to buy a first home once the share has been gifted?
A: This is probably a sad time for you, but that gift is a lovely idea.
And no, it won't affect your first-home plans — whether you just want to withdraw your money or also apply for a HomeStart grant. Many people using KiwiSaver to buy their first homes these days receive gifts from their parents.
Q: Recently, Brian Gaynor explained in his column why KiwiSaver funds were unable to match the performance of the New Zealand sharemarket. I hope you can explain the rules governing all KiwiSaver funds. Are they all required to invest their funds adhering to a prescribed formula of asset class diversity?
If so, it would be much better if the KiwiSaver system permitted investors to invest in any investment fund they choose. The saver's KiwiSaver status would be based on the person rather than the current requirement that they choose from a limited number of funds.
For investors unable, or lacking the necessary interest or expertise, to choose an investment fund, the current default arrangement could continue.
As with every government-derived scheme, the limitations are gradually being revealed. Astute investors eventually realise that the carrots may not be worth it, and savings freedom is worth more than they realise.
A: You've leaped to a wrong conclusion. There aren't many limitations on what a KiwiSaver fund can invest in.
Says a Financial Markets Authority spokesperson: "The overarching principles for KiwiSaver funds are that they must maintain liquidity and be able to calculate continuous or daily unit pricing."
Liquidity is about the ability to buy and sell assets quickly. A KiwiSaver fund can't have more than 20 per cent of its assets in investments that would take a long time to get out of, such as bank deposits with terms longer than three months or other investments that would normally take more than 10 days to sell.
But there are no rules about investing in a range of different types of assets.
Gaynor was writing mainly about multi-sector KiwiSaver funds, which typically invest — to varying degrees — in global shares, Australasian shares, bonds, cash and perhaps property. He pointed out that 95 per cent of all KiwiSaver money is in such funds, presumably because most members like the risk reduction you get from spreading your money over more than one type of asset.
However, 5 per cent of the money is in single sectors — all cash or all global shares, Australasian shares, commercial property and so on.
One unusual KiwiSaver option is offered by Craigs Investment Partners. You can select your own investments from more than 180 Australasian and international shares, funds and other investments. If you want, you can put all your money in one share — perhaps a big NZ company, or Warren Buffett's company Berkshire Hathaway.
For most people, I wouldn't recommend investing in a single company, but the choice is there.
Craigs' fees vary, depending on your investments. They get high marks for flexibility.
Another unusual option is Booster's Geared Growth Fund, which may borrow to leverage up its exposure to shares. "It is suited to investors who are comfortable with a high level of risk in order to potentially achieve higher returns," says Booster.
In the past, there was a KiwiSaver fund that invested in options, and no doubt other alternatives will emerge.
What's more, any KiwiSaver provider will let you invest in more than one of its funds. So the choice is pretty wide. However, for most people — who don't have many other investments except perhaps their home and maybe a rental property — the multi-sector funds work best.
- Mary Holm is a freelance journalist, a director of the Financial Markets Authority and Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. Her latest book is Rich Enough? A Laid-back Guide for Every Kiwi, and her website is www.maryholm.com. 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. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.
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