Anyway, regardless of the kiwi/aussie exchange rate, I absolutely don't recommend investing in currencies, sometimes called foreign exchange.
Even experts often get dollar movements wrong. For example, in a refreshingly honest press release last Tuesday, ASB said:
"ASB economists have reconsidered their currency forecasts and are now predicting the NZ dollar will reach parity with the Australian dollar ... The parity forecast now stands in contrast to findings in the (ASB Kiwi Dollar) Barometer, given that most survey respondents, in early February, were convinced the kiwi had peaked against the Australian dollar or, that if it went any higher, it wouldn't get above A97c."
The barometer surveys corporate treasurers and financial controllers of large companies with annual turnover of at least $1 million. If they got it wrong, can you or I expect to do better?
Investing in foreign exchange is what's called a zero-sum game. For everyone who makes a dollar someone else loses a dollar. That's Risky with a capital R. It's far better to make long-term investments in something that tends to grow over the decades, such as diversified shares — perhaps through a KiwiSaver fund.
Furthermore, to get really good diversification, you should include lots of overseas shares, to reduce your exposure to the ups and downs of just one economy.
And that raises the question of how overseas investments are affected by currency movements. Read on.
Hedging bets
Q: I am in the Kiwi Wealth KiwiSaver scheme, entirely in the growth fund. I have confirmed that 70 per cent of the growth portfolio is hedged against currency movement.
My preference is to have no currency hedging for my KiwiSaver funds, because I already have a high percentage of my other investments within New Zealand.
Do you know of any KiwiSaver fund providers that have non-hedged growth funds?
A: Just to clarify, a Kiwi Wealth spokeswoman says its growth fund "typically has a 70 per cent New Zealand dollar exposure. Our investment manager may vary from this level where it considers the variation necessary to protect and enhance wealth. However, we would not expect the NZ dollar exposure for the growth fund to move outside the range of 50 per cent to 90 per cent."
For the sake of other readers, what's this all about?
If a KiwiSaver fund, or any other investment fund, is fully hedged, that means the managers use financial instruments to remove the effects of currency movements on international investments in the fund.
If the fund is not hedged, currency movements can have considerable effects on your returns. Of course, you're perfectly happy if other currencies rise against the kiwi dollar, because the value of your international investments rises. But it's not so cheering when the other currencies fall.
A quick aside here: We tend to think more in terms of the kiwi dollar rising rather than other currencies falling — even though it's the same thing. But it's easier to understand what's going on if I express it in terms of what the other currencies do, so I'll stick with that.
Sometimes currency movements offset investment returns — shares are up but foreign currencies are down, or the reverse. But when both move the same way, you get seriously big ups or downs.
To avoid this volatility, many KiwiSaver funds that invest in international assets are partly or fully hedged, with some managers varying their hedging over time. The Kiwi Wealth statement above is fairly typical.
However, not everyone — you for example — wants hedging. And there are good reasons for choosing not to hedge.
One is that you might be planning to spend your KiwiSaver money largely on international travel or buying imported goods such as cars, electronic equipment, books or clothes. If that's the case, it's actually less risky not to hedge.
How come? Let's say that in the period before you spend the money, other currencies have fallen against the kiwi dollar. The value of your investments will be lower than if you had been in a hedged fund. But you won't mind because it will be cheaper to buy those currencies when you travel, and cheaper for importers to buy goods — pushing down prices.
What if the opposite happens, and other currencies have risen against the kiwi? The value of your investments will be higher, so you can afford the higher costs of international travel and imports.
Your savings rise or fall along with the prices of what you want to buy.
To achieve this, you want a totally unhedged growth fund. Last time I surveyed all KiwiSaver providers, several years ago now, there were two that offered such an investment, Smartshares and SuperLife. And they still do.
Says a Smartshares spokeswoman: "Smartkiwi offers the smartGrowth option that is 100 per cent shares and property, and the overseas portion is unhedged."
At SuperLife, which was recently bought by NZX, you can create your own mix of assets if you wish. "On overseas shares we have two funds, one hedged and one unhedged," says a spokesman. "Members can therefore choose any combination of the two and get the hedging percentage that they want. They can also change it at any time." Through SuperLife you can also invest partly or fully in Australian shares or emerging market shares, and those are unhedged.
If other providers now also offer a fully unhedged KiwiSaver growth fund, do let us know.
Marshall clause
Q: You've had several letters about lending to adult children. We lent money to each of our married children jointly with their spouses. Our solicitor prepared a simple (two-page) "Acknowledgement of Debt" which we all signed, and which she referred to as a "Marshall clause".
It simply shows the amount of the debt, that we can charge a "reasonable" rate of interest (we charge nothing at present), the loan is repayable on demand, and we can register the debt against the title to the property they bought with the money.
Easy really. It commits both people to the debt in case of a marriage breakdown and protects our capital, as the debt can be registered against the property they own.
A: Sounds good, although lawyer Peter Kemps of KempsWeir has some reservations.
"A Marshall clause is a clause that says interest will be payable if demanded, but otherwise not," says Kemps. "Often there is a limit on the amount of interest that can be required. The clause arose in a 1964 case involving a deceased estate (Marshall) and the IRD."
"A deed of acknowledgment of debt that contains a mortgage or an agreement to mortgage is a common means of securing a loan to a son or daughter and their partner."
But he adds a warning. "The mechanism of actually registering the mortgage to secure the debt is not so simple if not done at the time the loan is made, because of the need to have authorities signed before the mortgage can be registered.
"Those authorities can be signed only by the owners of the property (the child and their spouse) or by an attorney, so it's important to have them signed while all is well at the outset."
The main advantage of lending in this way "is that it gives the parents security and the ability to call the loan back if the relationship fails", says Kemps. However, there are disadvantages.
"The preparation and signing of the documents and registering of the mortgage may cost a few hundred dollars," he says. Also, there's uncertainty for the son-in-law or daughter-in-law.
"These arrangements, while perhaps born of the (sadly) realistic view that 50 per cent or so of relationships fail, often send a negative message to the in-law rather than a vote of confidence.
"Some parents take the view that it is worth 'investing' in the marriage of their children, and that giving unqualified support is more important than protecting their money.
If the father or mother of your grandchildren ends up with some of your money, is that such a bad thing?" asks Kemps.
Food for thought.
Investing a surplus
Q: After we pay our mortgage (a table loan of $498,400 at 5.5 per cent) plus all our other expenses every month, we have some money left over — about $2,000.
Is it best to be putting this extra money on our mortgage (this is what we are doing now and there aren't any fees for this) or are we better off investing in index funds or similar? Would the money saved on mortgage interest be better than whatever we could make in this type of long-term investment?
We are both 27 and are contributing 3 per cent to our KiwiSavers and have an emergency fund of three months' living costs.
A: You're doing well with your home, KiwiSaver contributions, emergency money and savings habit — all at 27. I'm guessing you're on fairly high pay, but still, not everyone your age has their act together.
Unfortunately, the answer to your question is "nobody knows". To come out ahead investing in a fund — as opposed to paying down the mortgage — you would have to make more than 5.5 per cent after fees and tax. In some years you will, in some you won't, and there's the rub. Such investments are risky, whereas mortgage repayment is virtually risk-free. So I suggest you stick with that.
It's also good to be building up equity — the difference between your mortgage balance and the value of the property. If you find yourselves wanting to borrow to start a business, it will be easier. And if you strike hard times and are struggling to make mortgage payments, your lender is much more likely to cut you some slack.
Once the mortgage is paid off, that's the time to get into other investments beyond KiwiSaver.
• Mary Holm is a freelance journalist, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.
