Not for sale

Smart KiwiSaver investments are those which access global markets.

This is the third in a series of columns by Joe Bishop* bringing a different perspective on KiwiSaver.

There was a true story from the 1970s of a Spanish man who won that country's Christmas lottery, one of the biggest (if not the biggest) in the world.

He chose to buy only tickets ending in 48 and eventually won. Asked why he had followed that strategy, he said he had dreamed of the number 7 for seven straight nights and "7 times 7 is 48".

Clearly we can't all be that lucky – and although he benefited from the local lottery, most of us are focused on a KiwiSaver investment that builds towards retirement and which involves skill rather than luck.

Advertisement

And, unlike "Mr 7 times 7 equals 48", we can't just aim at the domestic market to exercise that skill and build that future.

Why? Because New Zealand represents just 0.2 per cent of global markets. We are tiny. It's a question of diversification – not having all your eggs in one basket – and liquidity, so you can buy and sell at the most opportune moments.

New Zealand is experiencing something of an economic slowdown at the moment. No one is saying it is anything worse than that – the economy is still built on a strong base – but the slowdown is a simple fact, evidenced by the Reserve Bank cutting the OCR to a record 1.5 per cent recently.

Even before KiwiSaver investment, most New Zealanders are already heavily invested domestically through their homes, jobs and bank savings.

So any downturn at home would be far worse for those primarily invested locally, including KiwiSaver. How do we know? History. When we talk to our Kiwi Wealth investors, we discover that many of them still vividly remember, and bear the scars of, the 1987 global crash.

If you look back at that scenario, the global markets sprang back relatively quickly. New Zealand? Not so much. The reverberations kept happening here and it took 1987 and much of 1988 before the New Zealand market bounced back – and even then "bounce" is maybe being kind.

Global equity markets simply have more diversification across geography, industries and companies – so the risk is lowered…and that's a big part of our job, to manage the risk for our investors. It's also to take advantage of opportunities and we know, over the long-term, that global markets can be relatively cyclical – and can out-perform New Zealand markets as they did in 2016 and sometimes by almost double, as in 2013, and 2010.

So that's why our Kiwi Wealth KiwiSaver funds are skewed towards global markets. It's not that we don't have domestic investments, our conservative fund has 22 per cent New Zealand investments, our balanced fund 11 per cent.

Advertisement

There's nothing against New Zealand investment within that approach – let's face it, we have enjoyed a bull market for the last 11 years. But our concern for a New Zealand-based investment strategy for KiwiSaver is not just what happens in an '87-type crash.

It's also a lack of diversity and liquidity in a small market where there aren't many industries and companies available. In that kind of scenario, many fund managers are simply unable to get out of the positions they have adopted for their investors – either no one is buying or they have to compromise seriously on price, therefore compromising investors' key objectives.

Global markets' diversification and liquidity mean that, even in a big downturn, you may lose a button or two but you'll never lose your shirt.

Some people advocate hanging in there as a long-term investment strategy and, yes, that can work ok, depending on timing and other factors.

But simply relying on time is risky. Trying to make good decisions over, for example, a 20-30-year time frame, carries a strong risk that what seemed a good investment 20 years ago is suddenly no longer applicable. The real world is dynamic, so having a flexible investment strategy is vital – meaning you can review and correct as necessary.

That's why the best investors diversify, actively manage their portfolios, hedge their positions and constantly monitor what might happen next.

To go back to Mr "7 times 7 equals 48", luck can play a role but I always remember the quote often attributed to the great South African golfer Gary Player: "The more I practise, the luckier I get".

It's the same in investing; it's better to apply our skills to improve our luck – and part of that skill is knowing when and how to access global markets.

*Joe Bishop is General Manager of Customer, Product & Innovation for wealth & investment organisation Kiwi Wealth.