Weekend Money: Spoiled for choice

With hundreds of managed investments now on offer, finding the right one can be tough. And sometimes even the experts are divided on the best way to make a choice.

By Mark Fryer

personal finance editor

By now we know the argument - we're all getting older, the government can't support us in the manner to which we'd like to become accustomed and if we want a comfortable retirement we need to start saving now.

But anyone who takes that message on board faces an immediate problem - with hundreds of unit trusts, super funds, investment trusts and other types of managed investments all clamouring for our money, how do we choose?

To suggest some ways of navigating through this maze, Weekend Money talked to two experts from the US, where the choices facing would-be investors are even more daunting, with some 11,000 mutual funds (unit trusts) alone.

Do it yourself? Forget it, says Dr Bob Goodman, managing director and senior economic adviser with Putnam Investments, fifth-biggest mutual fund company in the US, which manages some $US280 billion - ten times the value of the entire New Zealand sharemarket.

The DIY approach to choosing the best managed investment, he says, "is a prescription for disaster."

Most of us have neither the time nor the inclination to do the necessary research and are better off relying on a qualified financial planner says Dr Goodman, who has been in New Zealand to speak at a series of presentations organised by fund manager Armstrong Jones.

And, he suggests, you should be prepared to pay for financial advice just as you'd pay for the services of a doctor, lawyer or accountant.

While it's important that your adviser has the necessary professional credentials, you also need to find someone you're comfortable with on a personal level.

When it comes to choosing a managed fund, says Dr Goodman, there are several things your financial adviser should be looking out for.

One is a management company that has been around for a reasonable length of time.

Look also for a manager which offers a wide range of products, he says. If your needs change in future it can be cheaper to move to another fund offered by a manager you already use, rather than having to switch to another manager.

Then you need to look at the fund's record in achieving its goals in the past, over a long term.

Don't do the tempting thing and choose a managed fund on the basis that it had a great record in the previous year, he urges. If you're thinking 10 years ahead, you should look at a fund's success in achieving its goals over a ten year period, rather than short-term results.

Look too at the individual fund manager, he says, and make sure the fund's expenses are reasonable, given that higher expenses will eat into the returns you receive.

And - the step no-one enjoys - "you want to read the prospectus very carefully."

When it comes to deciding where to put your money, says Dr Goodman, "the advice I would give in New Zealand is exactly the opposite of the advice I would give in the US."

There, he tells investors to keep 75 per cent of their money at home and invest the rest overseas. Here, he suggests investors reverse that ratio and put the majority of their money overseas, not just in the US but in other areas such as Europe and Asia as well.

How to invest in the rest of the world from New Zealand? Don't get too specific, advises Dr Goodman; choose a managed fund whose objective is to invest internationally and let the manager decide on the countries to invest in and the specific shares to buy.

If you're a long-term investor, he says, don't try to guess the best time to invest, just start doing so regularly.

Remember too that you have to accept some degree of risk if you're hoping to build up a reasonable-sized nest-egg for retirement.

While many investors may be tempted to stick with the security of money in the bank, "you can never accumulate wealth by lending your money to anyone - the only way to accumulate wealth is to own something," and for most of us that means buying shares, directly or indirectly.

While he's optimistic about the prospects for the US market for the next few years, Dr Goodman says New Zealand investors have to realise that a lot of growth may not rub off on our market, simply because most of the companies on it are just too small for the big international fund managers to bother with.

Do it yourself? Of course you can, or at least many investors can, says John Rekenthaler, research director at Morningstar, a US company which researches managed investments.

"Definitely some people need advisers and maybe even a majority of people need advisers," he says, but that doesn't mean everyone does.

Just as there are some people who enjoy tinkering with their cars and are good at it, so there are people who enjoy managing their investments.

"I call a mechanic, but that doesn't mean everyone else should."

Morningstar, which has gained something of a reputation as the small investors' watchdog, is probably best known for its ratings of the competing mutual funds, which are widely followed by US investors. The company also provides research to professional financial advisers, as well as investment software.

If you are trying to narrow down the choice of investments, suggests Rekenthaler, start in the obvious place by deciding what you want to achieve.

If you're young and want long-term capital growth, for example, you wouldn't put all your money into a fixed-interest fund.

If you're a new investor looking for a sharemarket fund, you probably want something diversified, perhaps an index fund or one that behaves in the much the same way as an index fund, by having a wide spread of investments.

Once you know what you want it's a matter of going to an adviser or doing your own research.

Some do-it-yourself investors in the US are now very sophisticated in choosing among the competing funds, he says.

Mind you, they have lot of information to be sophisticated with. Morningstar's assessments of mutual funds detail everything from the name of the manager, the fund's style of investment (which isn't always what the manager says it is) through to its past performance, what the fees are and how they rate against comparable funds, the individual investments it holds and a host of other esoteric data that only the most devoted analyst could understand.

But while some investors pore over the data, Ekenthaler says there is a universal tendency to choose funds purely on the basis of how well they did in the past.

But even if you look back at long-term performance - say over five years - he says that won't necessarily help you choose the best funds.

"What they are buying is a fund that's been in the right place over the past five years but there's no evidence that it's the right place over time."

That can lead to what he calls a "manic depressive" approach to investment - buy the fund that has performed well in the past, at a price that reflects that past success, then drop it when it fails to do so well in future.

For New Zealand investors who want to put some of their money into the US, he suggests most need something like blue chip fund, which concentrates on the larger long-established companies, or one that follows an index, such as S&P 500 fund (one which covers a wide range of shares, by investing in all the companies included in the Standard & Poors 500 index).

*Morningstar's financial news and data is available on the Internet at: www.morningstar.net or target=_top>www.morningstar.com.

*Interested in managed investments? Weekend Money has ten tickets to give away to a conference which will look at the managed investment business, the prospects for local and international markets in the year ahead and the business of asset allocation - dividing up your investments in the best way. Among the speakers will Don Phillips, the chief executive of Morningstar, as well as local and overseas fund managers. The two-day conference, organised by FPG Research, will be held at the Waipuna International Hotel in Panmure on February 22-23. To obtain your free ticket, contact Mark Fryer at: PO Box 32, Auckland, phone: (09) 373-6400 ext 8833, fax: (09) 373-6423, e-mail: mark_fryer@herald.co.nz. First come, first served.