The debate between active and passive fund management seems as far from resolution now as ever.
There does not appear to be any data that refutes my belief that there are a significant number of actively managed funds in New Zealand that consistently outperform the net returns of an index fund.
Provider X is often quoted as an example of active fund management over a number of years, so let's look at their KiwiSaver performance. (You then describe the fund's performance over several years.)
Mary, as a staunch supporter of index funds you must know what the top net returns were from a range of NZ-based index funds over a similar period. How did they compare?
You're missing a key point. The fund you name might indeed have beaten index funds.
Looking backwards there will always be some funds that do. But the only thing that matters from now on is: will it keep doing so?
The chances are high that it won't. That's why I've removed the fund's name and details from your letter. Otherwise impressed readers might be enticed into switching to that provider and end up deeply disappointed.
Lots of research - some discussed recently in this column - shows that top performers over a year or even a decade don't stay at the top in the following period. Some possible reasons:
• The fund invests in riskier than average shares - or smaller than average, or high-growth, or some other variation. In some periods these do particularly well, in other periods particularly badly.
• The fund managers got it right with their timing - perhaps moving out of shares before a market crash. Good call! But nobody always gets market timing right.
• Even if a fund manager really can pick shares and time markets well - a rare skill indeed - will the manager stay with that fund? They're sure to receive huge offers to move elsewhere. And how would investors know the star manager had left?
• Successful funds attract new investors and can grow too big to trade as easily. For example, if they hold 10 per cent of a company's shares and want to sell them, it will be harder to get a good price than if the fund was smaller and its holding amounted to only 1 per cent of the company's shares. Big sales push down prices.
• Their superior performance was sheer luck. There's a strong element of that in every market.
Another issue is establishing whether a fund has really been as good a performer as they make out.
In recent years, many investors have loved the performance of their New Zealand share fund, oblivious to the fact that the whole market has boomed and all funds have done well.
The fund should compare itself with the market, but even then it's not always valid.
As we noted recently, some fund managers weigh up their returns against an inappropriate market index. When a fairer index is used, their apparently strong performance is shown to be weak.
As wise people say, it's easy to look tall standing next to a short person.
Next week we'll look at how you can invest in index funds.
My wife and I are both teachers and for the past 12 years have been members of the State Sector Retirement Savings Scheme. We both contribute roughly the same amount each year - although her contributions could well have been higher than mine. I am with ASB and my wife is with AMP.
We have both chosen a split of 60 per cent growth fund and 40 per cent balanced fund, with significantly different results.
For the year ended June 30, 2016 the ASB fund is valued at $76,398 whereas the AMP fund is only $67,806. The return this year for ASB is $3577 after fees, etc, whereas the return for the AMP fund is a paltry $523.
The AMP statement tells customers to ring with queries - "talk to your adviser". My wife has rung twice and been told twice that an adviser will call back. She is still waiting.
Am I justified in being concerned about the poor performance of AMP?
Says AMP's Therese Singleton: "It is understandably unsettling for some members when funds go up and down because of cyclical movements in markets." But, she adds, "it is important to take a long-term view of returns and retirement savings.
"As well as investing in a wide range of assets to provide better diversification over the long term (which is especially important when you're saving for retirement), the AMP Balanced and Growth funds are actively managed.
"Actively managed funds aim to produce stronger returns than those of passively managed index funds (like ASB) - they achieve this by investing in higher-risk portfolios.
"In 2015, these AMP funds held higher weightings to emerging markets, commodities and infrastructure, which did not provide expected returns in the short term due to global market volatility."
She adds that those funds "have shown a material improvement in the most recent quarter". And "based on the current market outlook we expect the investment approach to continue to positively impact fund performance."
I have to say, though, that I would always expect an active fund manager to say that. If they didn't expect good future performance, they would change their investments until they did. Comparing returns over a single year is unfair, but your 12-year comparison is telling. And the difference will almost certainly be partly because active fees are higher than passive.
Despite your wife's difficulties in reaching an adviser, Singleton says: "We welcome every opportunity to provide advice and support."
With your wife's permission, I gave AMP your account details, and they say they have
contacted your wife. "We are in the process of providing further information and have offered to complete a full review of their investment needs."
I hope the review has been helpful. If I were your wife, though, I would consider switching to ASB.
With regard to your recent column, one difference between an offset mortgage compared to a revolving credit mortgage would be the possibility of it being subject to a haircut if an OBR event was triggered due to bank difficulty.
You're right - that's a possibility.
Under Open Bank Resolution (OBR), if a bank fails, a portion of depositors' funds can be frozen, and you may not get some or all of that money back later.
With a revolving credit mortgage, you put your income and savings into the same account as the mortgage, reducing your mortgage balance. Because the balance is negative - you owe the bank - that account wouldn't be affected by OBR.
On the other hand, with mortgage offset, your mortgage balance is offset against positive balances in other accounts, and those accounts could be affected by an OBR "haircut".
But not always. If a bank failed, the government would set a "de minimis" amount.
"Depositors' funds up to the de minimis threshold are exempt from being frozen," says a Reserve Bank spokesman.
For example, if the threshold was $15,000 and your savings and other balances were less than that, you would have access to all your money.
Note, too, that the Reserve Bank says a bank failure is "unlikely".
Both ANZ's and ASB's Australian owners offer offset mortgages in Australia. How do we get these banks to offer offset accounts here?
In light of the above Q&A, revolving credit mortgages seem better anyway. But some people find it easier to keep track of their finances if they have separate accounts for their savings, day-to-day money and mortgage, so they might prefer an offset mortgage.
BNZ, Kiwibank and Westpac all offer offset mortgages. So I put your question to ANZ and ASB. Here are their replies:
ANZ: "We constantly review our products in light of market conditions. We have no immediate plans to offer offset mortgages, but we are aiming to deliver enhancements in the near future to support our home-lending customers."
ASB: "ASB has no plans to introduce an offset mortgage in the short term. Customer feedback continues to indicate that our revolving credit home loan products (Orbit, Orbit Fast Track) meet the majority of needs of those looking for an offset mortgage."
Still, customers who would like the offset option should keep asking. That's how things get changed.
As a KiwiSaver since it started, I wish to question the so called "employer contributions" you promote.
When KiwiSaver started, employers did make a contribution, but today it is really the employee paying both.
For example, two employees do the same job. A - not in KiwiSaver - receives $25 an hour minus tax. B - in KiwiSaver - receives $24.25 an hour minus tax ($25 less 3 per cent employer contribution).
Stop giving employers credit where it is not due.
Unfortunately some workmates have opted out because of the difference in pay, which is a shame, as I have done well in the scheme.
The practice you're referring to - called total remuneration - isn't as widespread as you seem to think.
In a 2015 survey of almost 300 companies, the Employers and Manufacturers Association found it affected 28 per cent of senior managers and just 20 per cent of other staff. Most employers still make contributions over and above normal pay - and deserve credit for it.
The Commission for Financial Capability said in its recent KiwiSaver recommendations that total remuneration is a disincentive to be in KiwiSaver - as you say.
"The intent of KiwiSaver legislation is that compulsory employer contributions are paid on top of gross salary or wages," it said.
The commission recommends "more detailed investigation" of total remuneration, noting that in 2011 the Savings Working Group recommended against allowing it.
So change might come. In the meantime, though, employees in total remuneration companies still benefit from KiwiSaver by receiving tax credits. It's worth taking part.
Two weeks ago I wrote that the Commission for Financial Capability was looking at a plan to gradually raise the NZ Super age to 67. The commission has now recommended this.
And new Prime Minister Bill English is not ruling out such a change, unlike his predecessor John Key.
Under the recommendation, the change would start to take effect in 2027, with the NZ Super age rising in three-month increments. People who are now 55 would get Super at 65 years and 3 months; 54-year-olds would get it at 65 years and 6 months; and so on, until 48-year-olds and younger would get it at 67.
The commission has also recommended:
• Increasing to 25 years the time of residence required in New Zealand to get NZ Super.
• Phasing out the non-qualifying partner option for NZ Super.
• Changing the direct deductions policy for overseas pensions.
• Adjusting supplementary allowances.
For more information on the commission's recommendations on NZ Super and KiwiSaver, see here.