Bank's advice okay, service so-so

By MARY HOLM

Q: I have been a customer of the one bank for more than 40 years. Until recently I had a substantial total sum in that bank - current cheque account, call accounts, a number of term deposits and a couple of bank local funds.

A short time ago I was invited by a couple of that bank's investment advisers to a discussion recommending my taking up investment in overseas funds.

The net result is that I seem to have finished up with a complicated plaster of about 10 such funds, and I'm pretty much in the dark as to how they are functioning.

As far as any return of investment profit or appreciation of capital is concerned, the results to date are more than dismal.

I am wondering how one might rectify the situation? Would it be accepted practice to employ someone to realise those investments and lodge the amount realised somewhere else - at least somewhere where it can be managed and monitored and the return for taxation purposes is not so obscure, and also the question of exchange rates?

A: You certainly could find someone else to handle your investments. But in the process, they will want their share of the action. And I don't see why you should have to pay another adviser.

It's time to go back to the bank and ask for better service.

In your letter, you included some details in a not-for-publication postscript, partly because you don't want to "rock the boat for any establishment, or point the finger at particular bank personnel".

I think you're too nice. But, of course, I'll go along with your wishes. Still, it would be useful for other readers to know that the bank's implementation fee for setting up your investments was not far short of $10,000.

This, as you say, "may possibly account for their advisers' zeal in promoting the re-direction - more so than any particular concern for my financial welfare!"

You also say that the value of your portfolio has shrunk by quite a few dollars a day, "which could do a lot for one's lifestyle in (well-earned) retirement".

The shrinkage doesn't bother me too much, assuming:

* The advisers explained to you that your new investments would be largely in shares, so their value will fluctuate.

* You can live with those fluctuations.

* You're happy to tie up the money for around 10 years or more.

Unfortunately, you got into the overseas sharemarkets during a downturn. It's really discouraging to see your investment diminish from the start.

But history shows that, if you stay in the markets, share prices will rise again sooner or later. You can be almost certain to gain - and quite possibly gain a lot - if you stick with a share fund for a decade or so.

For all of the bank's shortcomings, it has probably done you a favour in moving your money into investments likely to produce higher long-term returns.

Still, if you expect to use your money within the next 10 years, or you're uncomfortable with fluctuating investments, talk to the bank advisers about moving at least some of your money into something less volatile.

What's more, if they didn't initially explain clearly to you that the value of your investments might well fall in the short term, they should rectify the situation without charging you any more implementation fees.

I'm also bothered by the lack of information the bank is giving you.

Along with the big upfront fee, the bank is no doubt taking an ongoing fee which, given your substantial investment, will probably amount to several thousand dollars a year.

For that kind of money they should be giving you easy-to-follow information on fees, returns, taxes and so on.

I think, too, that they've got carried away putting you into about 10 funds. While diversification is good, so is simplicity.

Many share funds are broadly diversified within themselves, so just one worldwide fund might suit your purposes. Certainly, you should need no more than three or four.

I suggest you ask the advisers' help in consolidating your investments. And, again, I think there should be no implementation fee.

If you're not stroppy enough to ask for all this, take this column in and say I told you to!

Q: Last week you made the good comment that the TV, newspapers etc should quote the gross indices and not the capital indices.

I agree and think that your comments were good and clear. But two of my hobby horses are:

* We should also get rid of quoting the Dow (30 invited stocks weighted by stock price and not value don't make a good index) when talking about the US market.

* When we take the next step and quote gains, implying returns, from indices we should do it after tax.

Quoting a 15 per cent change in index values implies a 10 per cent return to the average managed fund investor, unless they invest in an index fund, which is what they should do.


A: I absolutely agree about the Dow, and more or less about taxes.

In last week's column, for those who didn't see it, I said that gross share market indexes include dividends and capital indexes do not.

(By the way, one of my hobby horses is to use "indexes" rather than the optional "indices", as well as "bureaus" rather than "bureaux", and so on. I reckon that once a word becomes part of English, it should take an English plural.)

As I said last week, looking at share returns without taking dividends into account is like looking at property returns without taking rent into account. It's silly.

Despite this, the news media regularly report on the performance of various capital indexes around the world, including the NZSE40 capital index.

At least in the Business Herald there's a table that gives the NZSE40 gross index, and other gross New Zealand indexes. But the one highlighted on the front page is the capital index.

Why do all the media do this?

Because the capital indexes are older, so they've always been quoted. That's not a good enough reason!

Furthermore, as you point out, the most quoted American index, the Dow Jones Industrial Average, has other weaknesses.

The media should, instead, be quoting the Standard & Poor's 500 - or better still, a gross version of the S&P500.

The first problem with the Dow is that it includes only 30 shares.

Given the huge size of the US share market - whose shares are worth more than half all the world's shares - the 500 shares in the S&P500 give a more representative picture.

Secondly, the 30 in the Dow aren't even the biggest 30.

The shares in the Dow are chosen by editors of the Wall Street Journal, which is owned by Dow Jones, says Helen McKenzie of Guardian Trust Funds Management.

The 30 are all blue chip companies that are regarded as leaders in their industries.

But the editors can be slow in changing the industries that are represented.

It was not until late 1999, for instance, that Microsoft made it into the Dow.

At that point, it had America's biggest market capitalisation - share price multiplied by the number of shares.

Microsoft was one of four new companies added to the Dow that year, while four older ones were dropped. Previous changes took place in 1997 and 1991 - in other words, not very often.

Thirdly, the Dow is, as you say, "weighted by stock price and not value". What does that mean? Most of the frequently quoted indexes, such as the S&P500 and NZSE40, are weighted by market capitalisation.

The biggest company in the index, as measured by "market cap", has the most weight in the index.

For example, in the NZSE40 capital and gross indexes, biggest company Telecom has a weighting of 23 per cent, while smallest company Infratil has a weighting of 0.04 per cent.

A change in the Telecom price will move the index much more than a similar change in the Infratil price.

In the Dow, though, the companies are weighted by their share prices.

A company with, say, 1000 shares at $100 each has more weight than a company with 20,000 shares at $50 each, says McKenzie.

Presumably that seemed to make sense back in 1896, when the Dow first came into existence - although it took on its present form in 1928. Nowadays, it defies logic.

It means, for instance, that General Electric, with top weighting in the S&P500 because it has the biggest market capitalisation in the US, is only 19th in the Dow's weightings.

And Minnesota Mining, top in the Dow because its share price is highest, ranks only 56th in the S&P500, says McKenzie.

She adds that Minnesota Mining is only a tenth of the size of General Electric.

Note, too, that three of the biggest 10 companies in the S&P500, Pfizer, AOL Time Warner and American International, don't make it into the Dow.

So why do we quote the Dow Jones more than the S&P500?

Probably because the latter has been calculated only since the early 1940s.

The Dow has had an almost 50-year start.

As with the capital versus gross issue, it's simply a matter of continuing to do what has always been done.

Those in the finance industry do tend to prefer the S&P500.

But the ordinary investor - fed the Dow by the media - still follows the old index.

Turning to your point about tax, in many situations I think you're right.

To explain to others, a 15 per cent capital gain in many active (as opposed to index) managed funds amounts to a 10 per cent return, because the fund is taxed at 33 per cent on those gains.

For investors in the 33 per cent tax bracket, that is the correct tax take.

However, New Zealand-based index funds don't have to pay tax on capital gains. So the 15 per cent return stays at 15 per cent.

It's useful to point out this difference.

The trouble is that the active fund numbers are different for those in other tax brackets. And there are variations in the way active funds are taxed. It can all get pretty complicated.

In some situations, I think it's better to stick with the straightforward before-tax gains, and let people make their own tax calculations.

As I said above, simplicity is good.

* Mary Holm is a freelance journalist and author of Investing Made Simple.

* Got a question about money?

Send it to:

Money Matters

Business Herald

PO Box 32, Auckland

or e-mail: maryh@journalist.com.

Please note: Letters should not exceed 200 words. We won't publish your name, but please provide it and a (preferably daytime) phone number in case we need more information.

Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice outside the column.