Weekend Money: Money Matters by Mary Holm

Far from being spoilt for choice, investors building
up a portfolio in New Zealand need to look further afield for any diversity of stock.

Q: Is it really so necessary to include offshore investment in one's portfolio? There is a wide range of diversification in the index of New Zealand companies.

A: I wonder where you heard that. The major New Zealand share indexes are, in fact, remarkably undiversified.
Going offshore gives you access to so many other industries that it can really lower your investment risk.

Let's look first at what happens if you invest in the NZSE10, via the TeNZ index fund.

About half your money is in just one company, Telecom. And three forestry companies, Carter Holt, Fletcher Paper and Fletcher Forests, together make up almost a fifth of the index.

Add two companies that the stock exchange lists with Telecom in the media and communications category - Sky Television and Independent News - and almost three quarters of the NZSE10 is in just two industries.
[Admittedly, putting a phone company in the same industry as TV and newspaper companies is stretching it. But still ...]

The other six industries represented in the NZSE10 each account for less than 8 per cent. These percentages change all the time, but usually not drastically. There'll be one big change soon, though. Contact Energy is expected to rank in the top four companies of the NZSE10. Also, Brierley Investments and Fernz will be removed if they move their home exchanges overseas.

Turning to funds that follow the NZSE40, which covers the 40 biggest shares, the concentration is watered down a bit. But Telecom still makes up a third of that index.
You can reduce your Telecom dominance and still remain in New Zealand by going into Craig & Co's Mid Cap index fund MIDnZ. This follows our 11th to 40th biggest companies.

Here, the biggest company, The Warehouse Group, makes up less than 9 per cent of the index.

Property is the main industry, accounting for 19 per cent. Other big ones are: ports 17 per cent; consumer goods 14 per cent; and energy 11 per cent.

Then come: finance and other services; media and communications; and manufactured durables. In all, there are 13 industries, and seven of them aren't in the NZSE10.

Even so, if you simply cross the Tasman, you broaden your horizons further. The biggest industry in the Australian 20 Leaders Index, which Tower's Tortis-Ozzy fund follows, is banking. It makes up a third of the index.

This is followed by media and communications [no escape from that category], at 28 per cent; and mining and resources, at 17 per cent. Other big categories are insurance, and retail and household goods.

The biggest company in the Australian 20 Leaders is News Corp, at 14 per cent. That's followed by National Australia Bank, Telstra, BHP and Commonwealth Bank.
To really diversify, though, go worldwide. An easy way to do that is via AMP's WiNZ index fund.

It's trickier to do an industry breakdown of this fund. It includes more than 300 shares, mainly in the US, Britain, Japan, Germany, Canada and Australia.

But, AMP says, banking, telecommunications, and health and personal care each make up about 10 per cent of the fund. Business and public services is about 7 per cent. And energy, merchandising and insurance are each about 5 per cent.

The biggest WiNZ companies are, in order, Microsoft, General Electric, Wal Mart and Exxon. Microsoft accounts for just 4 per cent of the fund - a far cry from Telecom in New Zealand.

Going worldwide doesn't only get you into a wider range of industries.

You're also in different economies, which further spreads your risk.. Banking might do well in Australia one year, and badly in Britain.

For proof of the value of diversifying around the world, just look at the performance of many of the world's markets in recent years, compared with New Zealand's.
One last thought: many actively managed New Zealand funds aren't nearly as dominated by Telecom or the forestry shares as most of the index funds.

Still, that doesn't necessarily make them good investments. For one thing, they often charge rather high fees. You can also buy individual New Zealand shares, spreading your industry coverage. But, unless you invest several hundred thousand dollars, you can't get very broad diversification that way.

And both these options still leave you out of many of
the world's industries.

As Craig Stobo of BT Funds Management said at a recent conference, "The best combination is to live in this wonderful country, but earn your money from offshore markets."

Q: I know that depreciation can be claimed on rented residential properties, but I read and hear differing views on the accounting of depreciation at the time of sale.

If the property is sold for more than was paid, does depreciation claimed need to be paid back? The exponents of negative gearing schemes say that after a certain number of years it doesn't. What is the law?

A: It's time to quash an urban myth.

My first response to your letter was: not more on rental property depreciation!

Faithful Money Matters readers already know that, when you sell a property at a gain, all depreciation claimed is added to your taxable income in the year of sale.

But your second question intrigues me. I've heard much the same thing, usually from people trying to sell real estate.

I can't find any basis for it. Inland Revenue says there are no time limits on the clawback of depreciation.
No matter how long you claim it, if you then sell the property for more than you bought it for, you must pay back every dollar deducted.

There are two possible sources of the myth. One is a rather complex law that applied if you sold land or certain other assets within 10 years of buying them. But that law was repealed in 1990.

The other concerns tax records. Generally, you need to keep them for seven years. But that means seven years after the records have any relevance to your current tax situation.

If you own a property - or any other business asset - you need to keep it in your accounts for as long as you own it, says the IRD.

So next time a negative gearing type tells you about limits on depreciation clawback, ask them for chapter and verse. I bet they won't give it to you.

Q: You have abandoned your excellent principles and accepted the lazy view of how English should be used, viz: "a word means what we think it means".
[See last week's Money Matters on the word "freehold".]

Wrong. A word means what the dictionary says it means. If it doesn't, why have such a thing as a dictionary?
Just as much as 7x7 is not equal to 48, "electorate" does not mean "constituency", "decimate" does not mean reduce to 10 per cent, it means reduce by 10 per cent.

A page of figures added up by someone who can't do arithmetic is useless, and you would be one of the first to reject his total. A page of words written by someone who is ignorant of what many words mean is equally useless.

And there's lots of it about, to the great joy of the legal profession who earn vast fees sorting out the problems it causes. Please think again.

A: Okay. I surrender. But I think you, and another bloke who wrote in, got a bit carried away. He said: "By your reasoning - when everyone thought the world was flat then, indeed, it was flat.

"Freehold has a precise technical meaning and, as such, is not subject to evolving use of language. It is a legal concept which is as unchangeable as, for example, the technical difference between a viral infection and a bacterial infection."

My response: Arithmetic, the shape of the earth and viruses are irrefutable.

Words are just the labels we happen to use. Many words have both a precise technical meaning and a looser, common meaning.

And you can't stop common usage from changing. Dictionaries certainly acknowledge that. Take your example, "decimate". In the 1990 Concise Oxford Dictionary, its first meaning is "destroy a large proportion of. Now the usual sense, although often deplored as an inappropriate use."

You're a deplorer, I'm afraid. Your meaning, "kill or remove one in every 10 of" is listed second.

Still, to make you both happy, let's declare Money Matters a freehold-free zone. I never use the word anyway.

By the way, the second reader gave us some interesting history:

"The incorrect meaning of the word began when the Government of Sid Holland gave state house tenants the chance of buying the freehold of their house over a 25 or 30-year term. This was labelled `freeholding'."

* Got a question about money? Send it to Money Matters, Business Herald, PO Box 32, Auckland; fax: (09) 480-2054; or e-mail: maryh@journalist.com. 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. We cannot answer all questions or enter into direct correspondence with readers.