KEY POINTS:
Investors are running scared. Everywhere you turn, companies are going to the wall with your hard-earned cash.
First of all it was finance companies - taking thousands of Kiwis' life savings with them. Then clever investments such as ING's Diversified Yield Fund and Macquarie Fortress Notes lost much
of their value - despite being sold as safe investments.
Investors bought property through failed Blue Chip because they thought it was as safe as houses, yet many face losing their own homes over the fiasco. So what are the options for your cash and how safe are they?
The finance company example showed us that just because an investment pays a fixed interest, it isn't necessarily safe. In fact nothing is. Investing cash means lending money to a government or company, and the latter in particular can never be guaranteed against bankruptcy. Even so, some investments are far more secure than others.
Cash invested with a large company, especially one listed on the NZX or one of the world's major stock markets, is likely to be safer than that with a small company, even if it has an impressive-sounding name.
Size is not enough. Investors should be looking at a bank or financial institution's credit rating from one of the world's three top agencies, Standard & Poor's, Fitch or Moody's, before committing large sums of money to any. Even these agencies' ratings don't provide a guarantee, but at least lessen your chances of choosing the next lemon. In the case of bank deposits and debentures, the website Depositrates.co.nz lists ratings from these agencies.
It's important to look at the parent companies of institutions you invest with, says Jeff Matthews, senior financial adviser at Spicers Wealth Management, whose own firm is part-owned by AXA.
Pure cash-based bank investments with banks are unlikely to go wrong. In New Zealand, however, bank deposits aren't guaranteed with a protection scheme in the way they are in countries such as Britain.
"There is an implied assumption, for example, that the Australian-owned banks wouldn't let their New Zealand subsidiaries default," says Matthews. The argument is that the bad publicity resulting from such a failure wouldn't look good.
It should be noted, however, says Matthews, that ING's parent company hasn't stepped in to sort out the mess resulting from its suspension of two funds earlier this year - which made headlines in major international publications such as Forbes.
There are some innovative cash-based products around such as the Cash Advantage Fund, managed by AMP and sold by RaboPlus and Westpac's Cash Plus Trust. These products are proving hugely popular with investors because using the Portfolio Investment Entity rules allows them to cap tax at 30 per cent, a significant benefit for those who pay 39 per cent or 33 per cent on other bank deposits.
As Westpac, which pays 8.2 per cent on its Cash Plus Trust, says, if you're a top-rate taxpayer the investment provides the same net return as one paying 9.41 per cent a year.
Many investors who lost money in finance company and property investments over the past couple of years have said publicly on television and in the print media that they would never have invested in shares because they're "too risky".
Yet it is the "safe" end of people's portfolios such as fixed-interest debentures that have proved to be the most risky in the past couple of years.
There is an old argument that over the long term, shares may be volatile, but they are "safer" than bank deposits, because after 10 years your capital should be greater than the sum of the capital left in the bank.
Fisher Funds managing director Carmel Fisher says with the NZX's market average percentage earnings multiple now trading at close to 20 per cent below its long-term historic average, the whole New Zealand market could be described as attractive and worthy of consideration for astute investors.
As inflation increases, says Fisher, that return could look even more attractive over the longer term. "Assume a growth investment [share] is returning 20 per cent per year, the low-risk investment [cash] is returning 8 per cent and inflation is 3 per cent. Your real return is 17 per cent for growth and 5 per cent for cash. But what if inflation increases to 5 per cent? Your real return for growth is now 15 per cent and cash is 3 per cent. Thus your real return for growth has decreased by 12 per cent whereas the low-risk investment has decreased by 40 per cent."
For fixed-interest investments involving lending money to a company, the name of the investment - debenture, term deposit, bond or capital notes - matters little. What matters over and above - or even before - the interest rate is the borrower's ability to pay the money back, any guarantees, the liquidity of the investment and any threats to the capital.
Despite the widespread failure of the finance company sector, there are still companies issuing debentures and a small number, such as UDC Investments, South Canterbury Finance and Marac, have investment-grade ratings from Standard & Poor's. That's not to say that the malaise in the entire sector can't drive these companies out of business. It's just that an international ratings agency has judged them to be better than the rest. While people who invest via financial planners, stockbrokers and other advisers usually have a portion of their portfolio invested in bonds, Mum and Dad do-it-yourself investors often don't - preferring debentures.
Bonds as a relatively safe alternative to bank deposits or debentures haven't really sunk into the Kiwi psyche. Interest in the market is increasing, says David Speight, director of fixed-interest at Direct Broking.
The lack of private investor participation in bonds might be partly because they have to be bought through a stockbroker and the NZX's website for the NZDX market is aimed at professionals rather than the public.
Many of the latest issues have been relatively vanilla-flavoured bonds, issued by companies with investment-grade ratings, paying cash on maturity, says Speight. They are proving popular in the current market. Those issued by banks, he points out, are effectively a negotiable term deposit. "That is to say you can buy and sell the securities in the market before they mature."
Matthews says new clients are having the bonds portion of their portfolios invested immediately to lock in the good rates. With the economy faltering, the Reserve Bank is widely expected to reduce interest rates later in the year, which will leave some investors wishing they'd fixed into good rates while they could.
Not all debt securities are created equal. While many of the securities listed on the NZX are issued by large well-known names such as Auckland International Airport, BNZ and Rabobank, others are less well known and do not have the same ratings.
One erstwhile safe investment that investors ought to be wary of is mortgage trusts - where they lack capital. If there is no equity, there are no shareholders to foot any loss. It's passed straight to the investor instead.
"One size does not fit all investors. Every reader is different," says Michael Warrington senior consultant at stockbroker Projects Resource.
"It is vital in this environment that investors seek advice from professionals."
