For many would-be investors a little paddle in the Mighty River Power float is worth considering but it is not a sure thing. Photo / Supplied
Q: My uncle and aunty, who are both retired and not particularly well off, plan to buy shares in Mighty River Power. They think the shares are a sure thing (or in my aunty's words, "a licence to print money"). They don't own any shares at present - their savings are in their house and bank deposits - and don't seem to understand the risk involved in buying shares in a single company instead of diversifying.
I'd have thought that if they really want shares at this point in life, it would be much better for them to invest their money in a passive index fund - Smartshares, for example.
I can understand why they want to participate, given the hype, but am worried about the stress it would cause them if things were to go wrong. What do you think?
A: Broadly, I agree with you - although it probably wouldn't hurt if they paddle a little in the Mighty River.
The first issue here is whether anyone considering buying these shares should be investing in this type of asset at all, or for that matter in any managed fund that holds a lot of shares.
Because shares are volatile, most experts say you should invest only money that you plan to spend 10 years away or more. Although shares tend to bring higher long-term returns than less risky investments, if you invest money you plan to spend fairly soon, there's too big a chance the market will be down at the time you want to sell the shares.
Just because somebody is retired, that doesn't mean they shouldn't invest in shares. But it should only be money they plan to spend in a decade or more, or to leave to heirs.
The next issue is how to make a share investment. If somebody owns no shares - either directly or through a KiwiSaver or other managed fund - I always suggest that they start in a managed fund that holds mainly shares - often called a growth fund.
Although they have to pay fund fees, if they follow your suggestion of a passive or index fund, the fees will be fairly low. And managed funds have three big advantages:
Most importantly, as you point out, you get diversification. Your money is spread over many different shares. When some do badly, others will do well, especially if you have patience. If, instead, you wanted to diversify through direct share holdings, you would need to own at least 10 and preferably 20 or 30 different shares. You'd need at least $100,000 to do that properly.
You can usually drip feed your money into the fund and, unless there are withdrawal rules such as in KiwiSaver, take out the money as it suits you. It's simpler and more flexible than buying and selling shares.
The fund managers take care of dividends, stock splits and all the other admin.
Okay, but isn't the Mighty River Power situation a bit different from buying another single share?
Well, it's certainly not a sure thing. (Sorry, aunty!) The shares won't be a bargain. If the Government sold the shares really cheaply, there would be a huge outcry from the New Zealanders who don't buy the shares. They would say taxpayers have been ripped off.
And looking beyond the as-yet-unknown sale price, all you have to do is read about the risks listed in the MRP prospectus to realise there is much that nobody can predict about this company - not even the experts, let alone ordinary investors.
Having said all that, it's easier than usual for members of the public to buy a small parcel of MRP shares, and you don't need to pay any brokerage. What's more, there will be loyalty bonus shares for individual investors who don't sell for two years. They're expected to be worth only about $40 for someone who invests $1000, but still, it's a plus.
Therefore, despite my general advice about going first with managed funds, it's worth considering putting a small portion of your savings into MRP.
You learn things from direct ownership of shares that you don't learn from being in a managed fund. You can watch the ebb and flow of dividends, which vary depending on how well the company is doing and how much of its profits it keeps to invest in growth. You receive annual reports and other information. You can attend annual meetings and vote on some company decisions.
I suggest that anyone thinking about investing in MRP should ask themselves:
Can I put aside $1000 - or more if it's only a small portion of my savings - for spending in the mid- to late-2020s or later?
If I see my investment halve in value or worse, will I stay the course, rather than panicking and selling?
If you answer yes to both, you might want to make a small MRP investment - and be along for the ride.
Even as I type the word "small", I think of the scenario in which Mighty River Power shares do particularly well. It's possible. If it turns out I've talked you out of making a fortune, feel free to write and complain. I'll just smile and say I also talked you out of possibly losing a heap.
Q: The idea occurred to us to maybe buy some Mighty River Power shares as an investment on behalf of our two children. However, there might be better returns elsewhere.
Regarding KiwiSaver, for instance, if we put something in to start them off then they definitely get the $1000 kick-start right?
After that, though, if we set up an automatic payment into a KiwiSaver account for them (say $87 a month for a random example) do they get anything further from the Government or is it just the returns from the particular scheme?
Of course there may be other options that provide better returns than either of these, but we'd settle for resolving this question first before thinking about anything else.
A: You're right about the $1000 KiwiSaver kick-start. So if I were you I would sign up the kids. You never know when that kick-start might be reduced. Many providers will let them join with little or no deposit.
After that, though, there's no particular advantage to investing in children's KiwiSaver accounts until they are 18, when they become eligible for the annual tax credit. Up until then, a KiwiSaver account is pretty much like other savings accounts. And the downside is that generally the kids can't withdraw the money except to buy a first home or when they retire. You or they might prefer that they spend the money on tertiary studies or setting up a business.
The question then is whether you should also buy them Mighty River Power shares. Although your children are at the other end of life from the aunty and uncle in our previous Q&A, the questions to be asked are much the same.
Given that it sounds as if this investment will make up a large chunk of your children's savings, it's risky to put it all in one company.
On the other hand, maybe it wouldn't matter much if the share price plummeted. If that's the case, there could be more pluses than minuses in turning the kids into young shareholders. If you help them to follow the fortunes of the company and the share price, they might find it a great learning experience.
For FAQs for ordinary investors on investing in Mighty River Power, go to the Financial Markets Authority's home page, at www.fma.govt.nz
Q: Your recent discussion of family trusts and relationship property has prompted me to write about my situation.
My mother died 24 years ago, forming an estate trust upon her death, naming her many sons and daughters and her husband as its beneficiaries. My father receives all the income of the trust. He, along with my eldest brother, are the two trustees.
However, my father is now in his 80s with dementia, and no longer mentally capable. My eldest brother just got power of attorney and is now the sole trustee.
I am very uncomfortable with this. The requirement for impartiality on the part of trustees in considering the interests of the beneficiaries is paramount for me. I would like a trustee free of our family dynamics and emotions. But I find I am a lone voice in a large family that likes to "keep things in the family", with my eldest brother having all the power.
The trust's assets are considerable, and complicated now, given they include a family farm. Can you advise on any situations where you can require that an independent trustee is appointed?
My plea to any parents considering a trust like this is to ensure an independent person is always part of the mix. You cannot foresee the future. An independent trustee may help keep your family together in times of trouble.
A: Help is at hand. "The first thing your writer needs to do is read the trust deed, which is the written document setting up the terms of the trust," says Deborah Hollings Chambers QC. "The trust deed will state who has the power to appoint and remove trustees. We call that person 'the appointor'."
You can then ask that person to appoint a new trustee to replace your father. "Arguably, with a trust of this size and the number of beneficiaries, two more people should be appointed," she says.
If the appointor won't do this - perhaps because it's your eldest brother - or if it's someone who has died or is unable to do it, you can make an application to the court.
"The High Court has power under section 51 of the Trustee Act 1956 'whenever it is expedient' to appoint a new trustee. The fact that one of the trustees is unfit or incapable of acting would be sufficient grounds," says Hollings Chambers.
She also suggests you check to see if the trust deed includes a minimum number of trustees. "Some trust deeds specify that there must be three trustees at all times. If that is the case an application should be made for two more people to be appointed. I would suggest that the court should be asked to appoint at least two more people so that the trustees can be assured of acting independently and in the best interests of all the beneficiaries as they are required to do by law."
Hollings Chambers adds that she agrees that it's helpful to have an independent professional trustee on trusts of this size. "This should assist in making sure that trustees are not only aware of their obligation to act in the best interests of the beneficiaries, but also comply with that obligation."
Mary Holm is a freelance journalist, part-time university lecturer, 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.
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