TIME TO DISPEL SOME MYTHS

In dealing with prospective new clients lately there is a perception that investments in financial sectors, other than money in the bank, are in trouble. Nothing could be further from the truth. There is no doubt that the level of debt world wide has grown over the past few years with the creation of credit by printing more money. However, financial markets have over the past twelve months shrugged these debt increases aside.

There have been rises in nearly all markets world wide to the 28 September 2012. Our own market has been up there with the rest. As at 28 September 2012 the New Zealand NZX 50 index was 15.4% above the level of 30 September 2011. The Australian all Ords was up 7.8%, The Dow Jones Index 22.6%, the FTSE 10% and the Standard and Poors 500 up 25.8%, for the same twelve months period. Since 1 October 2012 the New Zealand and Australian markets have gained an additional 5% from then, to date.

These increases have reflected through to managed funds and in particular multi sector funds. A typical balanced multi sector fund would have a mix of investments designed to give 50% growth and 50% income. In the case of a Portfolio Investment Entity (PIE) the income would not be paid out as a regular distribution but would be reinvested back into the fund to purchase more assets. The gains (losses) are represented in the unit price. Most PIE can be set up to provide a fixed regular payment but that requires the investor to make an informed decision on what level of payment.

The average return for balanced multi sector funds over the past twelve months has been 10.67%. (Before tax but after fee returns from Morningstar research). The latest report on KiwiSaver funds from Morningstar Research reflects the last year market gains as well. The average return in Morningstar’s report to 30 September had Balanced funds returning 11.6% for the 23 funds surveyed and an average of 13.1% for multi sector Growth funds.

It is time that all persons in KiwiSaver assessed their asset allocation. This is the level of mix in each financial sector within their fund. As at the 30 September according to the Morningstar Quarterly report, 32% of the total funds are still in default funds. That is if a contributor could not make up their minds or did not know what to do as they began to save, they went into a default fund chosen by IRD. These funds have as much as 75% in cash. In this current interest rate environment with the Official Cash Rate (OCR) being at 2.5% and possibly likely to reduce further, the returns from these fund will be minimal.

Over the past year when the Balanced funds and the Growth multi sector funds have returned the above figures, the six default funds have averaged 7.4%. Multiply that 4.2% difference by 20 years and you are looking at a considerably lower return. For example, $10,000 is about the current average holding in individual KiwiSaver funds from July 2007. For the next 20 years the compounding affect on the $10,000 at 7.4% is $41,695 but at 11.6% it is $89,801 and that is without contributions!!

Also beware of the aggressive nature of some providers of KiwiSaver asking you to switch to them.Do not chase higher returns or changing providers without seeking professional advice. All professional advisers have access to reports such as the Morningstar one mentioned in this article. Consult your provider for a recommendation of a professional Authorised Financial Adviser (AFA) before making a decision to switch within your current fold or change provider totally.

Peter Smith is an authorised financial adviser and a certified financial planner and is the principal of Kepler Group Otago limited. Email: A disclosure statement is available on request and free of charge.

Footnote: Thank you to all my clients who made contact after the last column on 8 October.