The obvious lesson here is to check - before making an investment - how quick and easy it is to exit it. Photo / Getty Images
Q: I am in the process of tidying up investments and will be closing some managed funds.
I was somewhat surprised to learn that one fund manager has requested 63 days' notification prior to paying out and then the final payout is based on the unit valuation 63 days after such a request. The fund is primarily Australian equities.
This sounds somewhat extreme and especially that the investment only has a value of about $10,000.
While I don't think there is much I can do about this, I would value your comments.
Two months sounds way too long to me. But to be certain, I checked with an industry insider.
"It is very unusual, in fact, outrageous," said the insider, adding their firm would send the cash from an Australasian share fund to a client's bank account three days after it was requested.
"Any retail fund in Australasian equities should have sufficient liquidity to pay out this level of redemption, even if the portfolio contained some illiquid assets."
"Liquidity" refers to how quickly and easily assets can be sold. Most shares are pretty liquid, as they can be sold in a day or so on a stock exchange. Examples of less liquid assets are property or infrequently traded shares.
Insider continues, "Trust deeds contain provisions for longer redemption periods either for inherently illiquid investments (which these are not) or catastrophic market events. But these are a last resort, not designed for normal listed securities in normal market conditions."
As you say, there's probably not much you can do to speed up your withdrawal. And on $10,000, it's not worth the hassle trying. What's more, the markets might rise during the 63 days and you'll be glad of the wait. But of course the opposite might also happen.
The obvious lesson here is to check - before making an investment - how quick and easy it is to exit it. If the literature doesn't explain that clearly, give the investment a miss.
And don't be comforted by a promoter who says they will provide a secondary market, or will try to find a buyer if you want to get out of an investment. It might take many months for a buyer to emerge. And you might be deeply disappointed at the price they are willing to pay.
Financial adviser 'con'
Q: You alluded in your last column to research that past good performers may do worse in future.
Daniel Kahneman's research strongly suggests that investment advisers as a class have no ability to beat the markets they work in. Hence picking an adviser or fund manager is a genuinely random choice. Consequently, an individual adviser's or manager's performance will show regression to the mean.
For long-term investors, picking a manager who can beat the index is also chance-driven. Hence, with lower costs, direct investment in index funds is the best risk/return trade-off.
What no one in the investment industry admits is that for retail investors, the industry adds no net value through sustainably superior results. It's just an overhead and a lottery ticket.
But of course this truth is not observed within the very profitable industry.
The industry's value comes from selling "peace of mind" to financially uneducated investors, for typically a 1 per cent annual fee. Probably decent education would be cheaper nationally.
A cynic might conclude that the investment management industry is a legitimised con game, built on the lie that, "We can do better than the market for your assets". The punters' most likely outcome is the market return less the annual costs.
It would be fun to debate with an industry apologist.
P.S. Cognitive Dissonance Declaration: I use Craig's to manage most of my retirement assets.
First, an explanation for other readers. In this context "regression to the mean" refers to what happens to the advisers or fund managers who performed best in the latest period. In the next period, it's more likely than not that their performance will move back towards the average performance. In other words, the best don't stay best.
Turning to your main point, I agree with your harsh comments to some extent - with two notes of caution:
The work of Nobel laureate Daniel Kahneman and others is about investment returns. They matter hugely, of course, but when you're judging an adviser you should also take into account how well they assess their clients' needs, tax situation and tolerance for risk.
While all advisers might be equal in terms of the returns they're likely to bring you, one might beat another in these other important ways.
Most of the research is done in the US, and other much larger markets than New Zealand.
These markets are almost certainly more "efficient" than our market. And the more efficient the market, the harder it is for anyone to identify investments likely to grow faster than the market as a whole.
However, in this country, with many smaller shares and other investments not being analysed by many experts, it's possible that a fund manager or adviser might discover investments with extra growth potential. That's certainly what those in the industry say. As you point out, they would say that. But perhaps there's some truth to it.
The trouble is that it's really hard to pick which managers or advisers might, in fact, be superior - as opposed to just having a lucky run for a while.
As a result, for many years I've suggested what you recommend, investing in index funds - sometimes called passive funds. The managers of these funds don't try to pick investments but just buy the shares or bonds in a market index.
Index funds always give average performance - much the same performance as the index they're tracking. And they're cheaper to run, so their fees are lower, giving them a significant edge over actively managed funds.
If you'd like to invest in this type of fund, three KiwiSaver schemes open to the public use a lot of passive investing: ASB, Smartshares and SuperLife. Also, a number of providers partly invest passively, often using passive international share funds.
If you want non-KiwiSaver funds, check out the same three providers. Both in and out of KiwiSaver, you can generally spot a passive fund from the use of the words "passive", "index" or "tracker" in their title or description.
Finally, in response to your honest P.S. At the risk of sounding superior, I do practise what I preach! I've had the vast bulk of my long-term savings in index funds for decades.
Dollars over the Ditch
Q: I left New Zealand for Australia a few years ago and was hoping to return this year with a decent amount of savings to pay down my mortgage in New Zealand.
At the time of my move the Australian dollar was very high relative to the New Zealand dollar, but in the time that I have been here I have seen my potential take-home savings drop by almost 20 per cent.
Unfortunately I did not have the foresight to transfer money home while I was here from the beginning, so my question is: what is the best thing for me to do now with my Australian savings?
Should I leave it here until the Aussie dollar rises or start transferring funds home now with the New Zealand and Australian dollars close to parity, and put money into a deposit account until I return (given that New Zealand is now offering a better term deposit rate than Australia).
Over the years, so many readers' questions have amounted to this: what's going to happen to the New Zealand dollar versus some other currency? And my answer every time is, "I don't know. And nor does anyone else."
The way to deal with this uncertainty is to transfer money gradually from one country to another. When you look back later, you'll find you got a relatively bad rate on some of the money and a good rate on some. It certainly beats a bad rate on the whole lot.
Your best strategy is probably to put the money directly into paying down the mortgage - unless you would face an early repayment penalty for doing that.
If there is such a penalty, ask the lender how big it would be. In this time of rising interest rates, it might be minor. But if there's a large penalty, you could store the money in New Zealand term deposits until the penalty no longer applies.
Do the math, landlords
Q: In response to your correspondent last week wondering if she should sell her $900,000 Auckland rental property, the advice from some commentators would be "yes".
Making a number of assumptions, an indicative (conservative) budget can be prepared for this investment.
This assumes 50 weeks per year rented, rates of about $2500, insurance $600, repairs and maintenance 10 per cent of the rental income and a management fee of 7.5 per cent plus GST. I am using an interest rate of 7 per cent (close to the long-term average) and assuming no capital repayments (that is, interest only) but this does not affect the profit, only the cash flow. Depreciation (chattels only) is not included.
Changing these parameters within the likely limits (that is, performing sensitivity analysis) makes only a slight difference to the results.
The profit - $9600 - is hardly negligible, but the gross yield is 2.5 per cent and net yield 1.1 per cent. Note that those advocating rental investments cite the former. Whereas, particularly in the riskier areas such as the centre of the North Island, the proportionally higher fixed costs such as rates and insurance mean there is a much greater difference between the gross and net yields, and vacancy rates and maintenance are both likely to be higher.
One wonders if the property is under-rented. Looking at the rental market values at the tenancy services site for Mt Albert (chosen as a typical leafy suburb with two-bedroom bungalows) indicates surprisingly that the $450 per week rental is about the correct level (falling between the median and upper quartile).
So the analysis indicates that there is a high opportunity cost in owning this investment. While the capital value may well go up, this is uncertain and your correspondent may well be better off spending some of the sale proceeds and investing the rest for a higher return.
Thanks for a good example of the sort of analysis every landlord should do.
To make it clearer for others, the gross yield is the rent - $22,500 a year if it's rented for 50 weeks - as a percentage of the $900,000 value. That comes to 2.5 per cent.
But, as you say, the yield net of expenses is the number that matters. The net yield is the $9600 annual profit as a percentage of $900,000. That comes to about 1.1 per cent.
Clearly, last week's correspondent could get a higher return elsewhere - even in a bank term deposit.
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 website is www.maryholm.com. 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.
OPINION: Developing hobbies and exercising are part of a fulfilling retirement.