Reader’s rental returns just keep stacking up. Photo / 123RF
OPINION:
Q: I note that you are a keen supporter of KiwiSaver and managed funds. In my working career I have invested in these four times.
As an 18-year-old I signed up for PruPac, a combination life insurance and investment scheme. After five years of dismal statements I cashed in. I had put in $5000 and got $2700 back. The loss doesn’t seem much now, but at 23 in 1986 it was a fortune.
In 1995 my wife and I invested a $60,000 inheritance in Royal Sun Alliance “Wise” Investments, spread across four plans. After 24 months the value was down to $50,000. It took 10 years to break even.
In 2002, we purchased a rental property. We put $0 in and borrowed the whole amount. The rent has more than covered all costs. We kept buying and owned nine homes in South Auckland. We have always been cash-positive, although this has required time and management by us.
In 2010, I signed up to KiwiSaver. If I turned 65 today I would get $121,000, after my employer and I depositing $115,000 and government contributions of $7000. I have 61 per cent Balanced, 14 per cent Conservative and 24 per cent Growth with Fisher Funds.
In 2019, I started investing on Sharesies, 50 per cent on Top 50 and Top 10 passive funds and the balance on 10 “blue chip” companies. The passive funds are all more than 9 per cent down. I am $10,000 down on an $80,000 investment.
All of the managed funds that I have been in have changed ownership every few years. Why is this? Have the fund managers got their money and retired early?
I have zero faith in shares and managed funds. Property investment has been life-changing for us and is the single best investment that we have made. The conservative value of our rental portfolio is $4.5 million. Deducting the $0.88m mortgage, that gives $3.62m equity gain from $0 up front.
A: I understand why you feel the way you do. There are several reasons for your rotten luck with managed funds:
Also, your provider tends to charge higher than average fees — which you can see on the Smart Investor tool on sorted.org.nz. You might consider switching to funds that charge low fees.
Still, your numbers are surprising. Could you have calculated them wrongly? In any case, I would be surprised if things don’t look much better if you hang about.
Meanwhile, you have clearly had a great run with your rental properties although, as you acknowledge, they will have taken much more time and effort than the other investments. And you took a fairly big risk at the start, borrowing the full price. Not everyone thrives doing that — but we don’t tend to hear about the failures.
Looking more broadly than at a sample of just one family, most people who invest in either managed funds or property do just fine. The key thing is to stay invested for the long term.
Q: Your advice to employees receiving shares in their company, that they should sell them ASAP, was very wise.
My father-in-law worked for Arthur Yates for many years and received shares. When Yates was bought by Equiticorp those shares were substituted, and when Equiticorp went down the drain so did that part of his savings!
A: Oh dear. If he was still working for the company, that must have been a double blow.
It’s a good example of the importance of diversification. It’s best not to have your job and your savings in the same basket. For another example, read on.
Q: One of your fundamental pieces of advice is to spread the risk.
In my capacity as an accountant, clients used to tell me they would love to own the factory they were running their business from. I always used to tell them they would be better off owning their neighbour’s factory.
The reason is obvious. If they own the factory and the business fails, then they lose both the income from the business and their income from rent. If they own the neighbour’s factory and the business fails, then they will still have the income from the rent.
A: Wise advice! Of course, the investment in the neighbouring factory could also go wrong. But the chances of that happening at the same time as your own business failure are much lower.
Q: I often hear your referral to the Sorted website and the Smart Investor tool. How have you found the accuracy of this data?
I was recently reviewing my KiwiSaver. I am with Kiwi Wealth Growth Fund. The stated five-year return just looks incorrect. As per the Smart Investor tool, the average return over the past five years is showing as 4.27 per cent.
Under “Details” the following returns appear: 10.79 per cent, 4.71 per cent, minus 3.47 per cent, 30.99 per cent, and 5.35 per cent. A quick average of these figures gives 9.7 per cent.
And as at the end of March 2022, from the monthly report from Kiwi Wealth, the return is stated as 9.87 per cent.
Can you please explain the difference between the 4.27 per cent and the Kiwi Wealth figure of 9.87 per cent?
A: I haven’t had issues with Smart Investor data. But something does look wrong in your situation, so I asked Tom Hartmann of Te Ara Ahunga Ora, the Retirement Commission, which runs sorted.org.nz
“We periodically get these queries, primarily when people compare their latest statements or a provider’s website with the tool,” he says. “The most important thing to know is that all the fund data is flowing from the same source: the providers themselves. It’s what they are required to report by law each quarter.”
Problems arise when comparing returns for two reasons. It depends on:
Smart Investor shows returns after taxes, at the highest PIR of 28 per cent. “And we show returns after fees, by rolling both the flat dollar fees and the percentage fees together. We feel this is most helpful in comparing what investors truly get in the hand,” says Hartmann.
“But not all platforms make the same decisions, so by looking at a statement or another website, you will be looking at a different result that is both correct yet varies, simply because they show their results before taxes or without taking flat fees into account.”
In volatile markets, this can make a huge difference. And it’s the explanation for the difference between the 4.27 per cent and the string of numbers that average around 9.7 per cent on Smart Investor.
On that tool, the big returns number you see — the 4.27 per cent — is the most recent average return over five years, which is updated each quarter. But in the return Details, the annuals results are for the years ending in March — the latest being for March 2022.
“You can’t typically roll up the annual results and recreate the five-year return,” says Hartmann. “This is due to the way the data is supplied to us (ie, that’s all we get). We included the annual results to show how things can swing wildly and how a fund has consistently (or not) tracked its peers.”
So the difference between 9.7 and 4.27 per cent suggests the Kiwi Wealth Growth Fund has had a bad run since March 2022 — as have most funds. And, indeed, the provider’s website says its growth fund return over the last 12 months was minus 4.41 per cent.
Kiwi Wealth also says its Growth Fund return over the five years to the end of March 2023 was 6.47 per cent — closer to the 4.27 per cent, but again over a different period.
I agree with you that this is all rather confusing. It would help if Smart Investor explained what’s going on in a note of some sort. Says Hartmann, “We’ve chosen to respond directly to those who contact us with questions, as there are such a wide variety they can never be covered satisfactorily in a note.”
I still think Smart Investor is the best way to compare KiwiSaver funds. You are comparing like with like, over the same periods. That’s what matters most.
Some other points:
Good on you for checking how well your KiwiSaver fund is doing. I wish more people did that.
- Mary Holm, ONZM, 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 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.
'Debt becomes more like a rent payment that people get so used to paying.'