Investors need more education

By PAUL PANCKHURST

If Securities Commission boss Jane Diplock was Santa, her stocking stuffer for the average investor would be a simple lesson on the risk and return ratio.

Fifteen months into the job, the Australian - formerly with the Australian Securities & Investments Commission - sees a lack of sophistication in New Zealand's retail investment market.

The sophistication of retail investors is topical because of a wave of fixed-interest offerings.

Wary of the ups and downs of the sharemarket, investors are being wooed and won by these products.

Corporates keep pumping out capital note issues. Finance houses cram newspapers with ads blaring top interest rates.

It is easy to think the word "fixed" means the return is a certainty.

Frankly, said Diplock, the market was "not all that savvy about the whole risk return ratio".

"It's quite difficult for people to understand real interest rates and I don't think they necessarily understand that double digit interest rates at a time of very low inflation are inherently risky."

Many investors grew up in the days of double-digit home loan payments.

"So, it doesn't seem such an extravagant sort of amount for them to receive back as an investment - even though times have changed so significantly."

Not everyone understood the level of risk required for, say, a 13 per cent return.

People were also dazzled by some of the words in the offerings.

One little dazzler: the word "mortgage" - as it popped up in such things as contributory mortgage schemes.

It was familiar, it felt so ... safe.

Many did not understand that a development mortgage entailed a development risk.

While it is not the job of the Securities Commission to shield investors from legal but risky offerings, Diplock does accept an obligation to help educate.

That said, she already has a big job on her hands in trying to educate investors about investment scams taking many millions of dollars. Diplock said typically the big scams targeted particular communities - religious, ethnic or regional.

"They get the trust of one person in the community and then that person - the dupe if you like - then spreads this fantastic, this secret, investment opportunity to many others. "And those scams have been pulling very large amounts of money out of New Zealand."

One example - under investigation by the Serious Fraud Office - sucked $40 million out of "a relatively small area", she said.

Another ongoing problem: the cold calling from overseas by bogus brokers.

"People send anything up to $100,000, expecting to get great returns, and all they get is a piece of paper.

"When they try to follow up, there's nothing there, the fax Machine's turned off."

Back on the topic of fixed interest offerings, Diplock said a lack of confidence in the equity market was another factor fueling demand.

"To some extent, people here, perhaps having had a very bad experience in the 1980s, for example, have not a lot of confidence in the equity market, and they seem to trust debt markets a little more. I'm not sure why."

Around the world, the bear market in equities had investors looking for alternatives.

"People aren't getting the return in their super funds, their equity investments, so they're often looking for a product to give them higher returns."

However if people put money into high interest investments that they did not understand, they were not so much investing as gambling.

"That's frankly what some people are doing in some of these offerings."

* In Forum tomorrow David van Schaardenburg, executive chairman of investment strategy and funds management research company FundSource, and financial planner of the year Fiona Judd, of Broadcase Financial Services, give their views on investment policies.