By MARY HOLM
Q. You warn against "one share wonders" - putting all or a substantial part of an investment portfolio in one or a limited number of shares. You advise share funds instead.
Let's look at an alternative view.
Sky City made a special offer of only having to pay half the then share price, paying the balance a year later, and shareholders received three substantial dividends in less than 12 months.
Blind Jack could see that was a good deal.
In hindsight, I wish I had put everything I could lay hands on into it (but I certainly did invest).
At this point the price has doubled, and the share has paid substantial dividends.
Sky City is so cash-rich it is giving the shareholders a nice 20c a share Christmas present, after having given a two-for-one share bonus plus paying out an increased bi-annual dividend.
There would be no mutual fund, I believe (or safe bond or real estate investment or any combination of the three) which would come close to matching the result over the same time frame. While share funds have dropped, Sky City goes up.
Let's suppose something happens negatively to Sky City, and its share price drops by a massive $3.
I would still be well ahead on the share price - and would have had all the dividends as well.
Looking at your 10-year scenario, I would make book that if I left everything in SKC (or better yet bought more), it would outperform any share fund you could put up against it.
It is hard to bet against human nature.
Again, I am sure your readers would be interested in an alternative (successful) viewpoint to yours on this matter.
A. How appropriate that Sky City is the share you love, given that putting lots of money into just one share is rather a gamble!
You mention that in hindsight you wish you had put more into the special offer - which was actually made not by Sky City but by shareholder BIL.
Still, that doesn't change things much from your viewpoint.
As has been said many times, hindsight is a wonderful thing. It's easy to find a share that, over a period, performed particularly well.
It's also easy, though, to come a cropper if you assume it will keep performing so well.
Look at it this way: If the big financial institutions agreed with you that Sky City's high returns would continue, what would they do? Buy up large.
That extra demand would push up the price until it got to the point that the returns didn't look anything special.
That's how efficient markets work. And while many people claim that the market for smaller New Zealand shares isn't very efficient - largely because the big institutions don't bother with them - not many would say that about Sky City.
It's always possible that you have a better insight into Sky City's future than the analysts. If you reckon you have, go with it. You might turn out to be right, and make heaps.
But as far as 10-year bets are concerned, I'd much rather stick with a share fund.
A lot of bad stuff can happen to a company in 10 years. If you hold only that company, you lose badly. If it's just one of many shares in a share fund, there's a good chance some other rises will cancel out that fall.
Another way to look at it: Generally, in investment, the higher your risk the higher your expected return.
But big institutions, whose market moves set the prices of shares, never invest in just one share.
That means that prices don't take into account the risk taken by those who do.
In other words, you're taking a risk that you won't be rewarded for. Who needs it?
Q. I take issue with your column (Weekend Herald, November 9) assuring Tower investors their investment funds are safe.
While you may be right, my experience has been that as soon as any uncertainty of getting your money back arises, investors want their money back.
And I have no doubt, because of the long-term nature of some of these investments - as Tower will have invested clients' funds on their behalf in worldwide equities - any sort of a run on Tower funds locally will require the withdrawal or cancellation of some of those overseas investments before maturity dates and while overseas sharemarkets are at a horrendous low.
So, while the repayment of funds is fine for those withdrawing now, what about those in the bottom 20 per cent of Tower investors? Will there be enough left for them? Losses must have occurred to the capital sums invested.
Tower long ago gave away the tremendous cash flow generated from life insurance premiums in favour of the (to them) perceived glamour of fund management.
Where now do they make their money? Where does their profit come from?
Investment returns for clients have to be returned to those clients. Tower is merely investing on behalf of clients. It is not their money.
A. Right. And they can't take it
Tower's investment funds are set up as unit trusts, group investment funds (GIFs) or superannuation funds.
Their assets aren't owned by Tower. They are held in the name of a custodian who is answerable to a trustee. And, under the trust structure, the beneficial owners are the investors.
The trustee's job is to protect the investors' interests.
What happens when investors want out? "Each fund has usually got a liquidity portion, of 5 or 10 per cent in cash, for withdrawals", says Richard Baker, Tower's general manager of marketing, risk, health and investment products.
If there's a run on the fund, and that cash runs out, the fund would have to sell some of its investments, as you say.
At that point, the trustee has to balance the needs of investors who want to exit and those who want to stay.
If the assets would be sold below their fair market value, investors remaining in the fund would be hurt.
To prevent that, "trustees normally can freeze or limit withdrawals", says Baker.
So far, there has been no need for this. And there shouldn't be. As I said last week, the fortunes of Tower affect its share price, but shouldn't affect the value of its investment products.
Bailing out of a Tower fund would, as Baker puts it, be like throwing away your mail because you don't like the mailman.
The trustee of most of Tower's unit trusts is the Public Trust. For the superannuation funds and GIFs, the trustee is Tower Trust.
That's part of Tower Corporation, but "there are powerful legal obligations for the trustee to act in the best interests of the scheme", says Baker.
What's more, GIFs must also have a statutory supervisor, which in this case is Perpetual Trust, an entirely separate organisation.
"It looks over what the trustee is doing," says Baker. "It's an extra layer."
You ask how Tower makes its money.
Basically, it's by charging management fees for running its investment funds. The fees come out of investment returns, whether they are positive or negative.
Market forces keep them in check. "We could charge more, but then nobody would invest in our funds," says Baker.
He notes that Tower didn't get out of the life insurance business, as you say. "We've still got the life company. What's happened is that the market increasingly moved towards unbundling (life insurance and investment products). We decided to go where the growth was."
Q. May I also ask for some reassurance concerning an investment with Tower?
Two years ago my wife and I purchased an annuity at a cost of $46,000 to give us an income of $4500 per year, tax paid. This annuity is guaranteed for 10 years and continues for the life of both partners. The investment statement calls it a Tower pension and the issuer is Tower Corporation.
The promoter is Tower Employee Benefits, a subsidiary of Tower Retirement Investments Limited, and a member of Tower Financial Services group.
The above detail is taken from the Tower Employee Benefits investment statement.
May I say that I am not a past employee of Tower.
We are both very elderly.
My question: Do you think my annuity is safe?
A. Yes I do.
There are pretty strict rules and standards governing Tower Life New Zealand, which runs your annuity, says Richard Baker.
When you gave the company your $46,000, it made long-term investments from which it takes your regular payments.
In the company's constitution, if those investments make surplus returns, it can pay out dividends. "Apart from that, it's not allowed to appropriate life company funds" for any other purpose, says Baker.
Tower Life is audited regularly.
It also assesses itself regularly against the New Zealand solvency requirements issued by the Society of Actuaries, "to ensure the company remains solvent under adverse scenarios", he says.
And - if you can cope with another mouthful - it assesses itself against the capital adequacy standard of the Life Insurance Actuarial Standards Board in Australia.
"That's a more stringent test of the company's financial strength," says Baker.
"We pass with flying colours on all of them."
You and I, of course, have to take Baker's word on this.
But I would be really surprised if skulduggery was going on. It would ruin many careers.
I reckon somebody would blow the whistle.
We can take some comfort, too, from the fact that Standard & Poor's gives Tower Life a rating of A minus.
True, it dropped from A after the recent bad news, but it's still a strong rating.
Still worried?
Baker says he will talk to any Tower client who is concerned about the company's situation.
He can be reached on 0800 486 937.
* Got a question about money?
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Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice outside the column.
Better not to bet on betting
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