Money: Interest rates govern investing

By Mark Fryer

Investment experts may tell us to ponder any number of factors when deciding where to put our money, but it seems that many of us ask just one question - what are interest rates doing?

That's one conclusion that can be taken from a study by research group Morningstar, which set out to see what link there was between interest rates and flows into managed investments such as unit trusts.

The study found that when interest rates are relatively high, the flow of money into managed investments dries up. When they fall, the tap is turned back on again.

While that may not be surprising, the strength of the relationship is dramatic.

"When interest rates were climbing in the year to 30 June 1998, inflows to managed investments fell," says Morningstar's managing director Graham Rich. "As interest rates fell the following year, inflows to managed investments increased substantially."

Should the banks be worried about losing money out of term deposits? Not now they have moved into the managed investment business.

What they lose on term deposits, they tend to pick up again when investors go looking for other homes for their money.

In the year to the end of June, four of the five top fund managers - in terms of the amount of money they took in - were banks (the sole exception was Tower group).

Largely because they have a better distribution network than competing fund managers, says Morningstar, the banks have kept a stranglehold on money flowing into managed funds in the past two years.

However the bonanza may be slowing, says Mr Rich. "The inflow to New Zealand retail managed investments over the June 1999 quarter was half that of the first quarter of 1999."

In the nine months from mid-1998, some $1.6 billion flowed into managed investments, though that flood has slowed down markedly in the three months to the end of June.

Short-term, Morningstar's experts believe interest rates are unlikely to move much, but longer-term there are signs that they will rise again, which - if the relationship holds - could mean a surge of money back the other way.