Money matters: Bank on the bank to find your home

By MARY HOLM

Q: Unlike many of the people who write in to your column, my husband and I are not "financially well off," have not paid off a mortgage and do not have any spare income at all!

We are, however, in a fairly enviable position. We have recently moved to Auckland and have found house prices in central Auckland (where my husband works as a first-year teacher), unworkable.

Consequently, very kind friends have agreed to rent us their home for $100 a week for one to two years.

My husband's salary is $443 a week net, and we can live on that, just. I am at home with small children.

My question to you involves our savings, which equate to about $105,000.

Currently, they are invested with the bank, earning about 5.2 per cent before tax, on call. What would you suggest we do with this money?


A: Your letter might raise a few eyebrows. With more than $100,000 in savings, you can hardly plead poverty.

Still, you are on a low income. And that means your savings are particularly precious.

What you should do with that money depends largely on when you think you might use it.

I hope that, when your wonderful cheap-rent deal ends, you're not expecting to eat into your savings for day-to-day living.

With any luck, your husband will be making a bit more by then, so you'll manage on that. Or maybe you'll take on some part-time work.

Still, you never know when you might suddenly need a bit extra, especially when you're on such a tight budget. So I suggest you keep, perhaps, $5000 on call and another $10,000 in three-month term deposits.

Some people hesitate about putting emergency money into term deposits. If you have to get it out early, you can be quite severely penalised.

But hopefully that won't happen very often. And in the meantime, you are earning higher interest than with on-call money.

What about the other $90,000? I suggest you plan on using it to buy a mortgaged house when your $100-a-week rent deal ends.

While renting is sometimes smarter financially than buying, most families with young children like the security of having their own home.

At current mortgage rates, you could get a $60,000 25-year loan, and pay around $100 a week in mortgage payments.

Add that to the $90,000, plus $5000 to $10,000 in after-tax interest you can earn on that in the meantime, and you have $155,000 to $160,000.

You're not going to get much of a house in central Auckland for that. But there are small places in some suburbs for around that price.

If you can settle for being a bit crowded - and hubby can cope with commuting - at least you'll have a home.

Or, if you could stretch to around $150 a week in mortgage payments, you could get a loan of $90,000 and buy a bigger house.

If you like this idea, invest the $90,000 in term deposits for as long as you think your rent deal will last. Generally, these days, the longer the term, the higher the interest.

Go for the highest interest offered by a bank or bank-affiliated company.

Don't go looking at other investments that pay higher rates still. Some work; some don't. I've seen too many people burned from chasing high interest.

And don't even think of going into shares, property or any other volatile investment. There's too big a chance your money could lose value over such a short period.

By the way, I worry that the people we hire to teach our children don't get paid enough to easily support a family. But that's another story.

Q: I'm a sharebroker. I just ran my monthly performance model and it tells me that WiNZ returned minus 8.2 per cent over the 12 months ended April 30.

We subscribe to MSCI's global indices, which we convert to a New Zealand dollar basis to see how global equities have performed.

Well, Mary, the story is that WiNZ is down 8.2 per cent, but the MSCI index is only down 0.2 per cent.

Given your long-term love affair with WiNZ, I thought this would be of interest, especially because tracking error is a no-no in the indexed fund business.

I brought this deviation to AMP's attention at Christmas, and it did not have an answer. Do you have any thoughts?

I'm sure the index data is correct. I wonder if the sampling model which AMP uses overweights growth stocks over value stocks, because in the period growth was slow and value was up about 15 per cent.


A: Your letter certainly put the love affair in danger.

But I thought I'd better give WiNZ, or at least the blokes who run it, a chance to give their side of the story before planning my big bust-up speech.

They say WiNZ has little tracking error - which happens when an index fund performs differently from the index it tracks.

So how come you got the numbers you did? WiNZ doesn't track the MSCI world index, but the somewhat different AMP World Index.

The differences are that:

* The WiNZ index covers only six countries: Australia, Canada, Germany, Japan, the UK and the US.

They're chosen for tax reasons. In any case, shares in those countries, particularly the US, make up the bulk of the MSCI index.

* For cost reasons, the WiNZ index excludes the smaller companies in the MSCI index.

In total, WiNZ holds shares in companies that account for about two-thirds of the value of all the shares in the MSCI world index.

When AMP created the index, in June 1997, it expected it would perform fairly similarly to the MSCI World Index. And it has.

Since 1997, the AMP capital index has grown 103 per cent, and the MSCI capital index 99 per cent.

But if you look at just the one year ending April 1, the AMP index fell 7.7 per cent, while the MSCI fell only 2 per cent, says AMP.

"Over the last year, large-cap stocks have underperformed the MSCI index," says Simon Urquhart-Hay from AMP Asset Management, which runs WiNZ.

"But over the longer term, and since the inception of WiNZ, the large-cap stocks have outperformed the MSCI index."

This tends to happen.. The bigger companies are the winners for a while, then the smaller ones have a go.

Over the long term - and all share and share fund investments should be long term - it probably wouldn't matter much whether WiNZ had its bigger-company bias or a smaller-company bias.

So there we have it. The difference in indexes accounts for most of the performance difference.

Urquhart-Hay also says, though, that he thinks you got the MSCI down 0.2 per cent, while he got it down 2.0 per cent, because you used the MSCI gross index, which includes dividends.

Apparently, you used the WiNZ share price to calculate the return on it. That price does not include dividends. So it's fairer to compare it with the MSCI capital index, which excludes dividends.

Okay, I can hear you protesting that the return on WiNZ was the same, with and without dividends.

That's because WiNZ pays low dividends, reflecting international dividend policy, and management fees tend to cancel them out.

But if you want to look at gross returns, you should still include the WiNZ dividends. Management fees are a separate issue.

Nice attempt at breaking up the romance. But I'm still in love.

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

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