Money Matters - New house, new friends, new portfolio

By MARY HOLM

Q. I have a mortgage-free house in Auckland valued at $280,000. I was thinking of moving to an area where housing is cheaper. In particular, I had in mind Oamaru.

I would be freeing up the balance for investment. I considered either placing the balance with Tower or Axa to produce the best possible capital gain.

What would you suggest? I do not need the income from these funds as capital gain is my sole aim.


A. Think hard before you make your move. It might well be wise financially. Generally, especially over periods of five or 10 years or more, you will get higher returns in a share fund than you would on your Auckland house.

House prices used to grow at sometimes phenomenal rates. But now that inflation is lower, that growth is much slower. Meanwhile, low inflation tends to be good for share price growth.

You should consider, though, that there will be costs involved in moving. You'll probably pay quite high commission to sell your Auckland house. Then there are moving expenses, legal fees for selling and buying, and so on.

All of that will eat into your financial gains and, no doubt, cause a few hassles. No move runs absolutely smoothly.

Perhaps of more importance, the move will disrupt your life. You don't mention a job, so presumably you don't have one - perhaps you're retired - or you're confident you can get work in Oamaru.

But you'll probably also need to find a new social circle, new doctor, dentist ... all the people and services everyone needs.

A fresh start might be just what you want, though. If so, perhaps you should rent out your Auckland home and rent a place in Oamaru for, say, six months - including a southern winter!

If you love it there, sell and buy after that. It will also give you time to see which part of Oamaru you like best.

Once you've made the permanent move, I would suggest putting some of the money you've freed up into a New Zealand share fund and some - preferably more than half - into an international share fund.

As I've said many times before, I like index funds. Tower offers some; so do several other fund managers.

A good independent financial adviser or sharebroker can tell you about your options.

One more point: your returns in any share fund will be volatile. If that bothers you, you could go into another managed fund that holds fixed-interest investments as well as shares. It will be less volatile. But your returns will tend to be lower.

That means you're quite likely to end up making smaller capital gains than you would have on your Auckland house.

The success of your whole plan, then, hinges on your tolerance for taking some risk in your investment.

Once you've weighed all this up, if you're still Oamaru-bound, I hope you enjoy it. I hear it's a charming town.

Q. I must say I thought you were a bit tough on your reader (Money Matters, March 11), and was surprised at your comments regarding the NZ Guardian Trust Property Fund. (The reader had tied up her money for two years, and couldn't get it out early.)

Have you ever read a Guardian Trust prospectus? Not many people do. That is why short form investment statements are appearing.

Every unit trust prospectus confers, on the manager, the right to suspend redemption whenever he likes. Who would invest if this was made clear to them before signing the cheque? Not many, I bet!

The issue, I would have thought, was one of ethics more thanone of, "you didn't read the fine print."

Looking at the Guardian Trust web page, I infer that I can get my money back by paying them a 1 per cent fee, and why shouldn't I be permitted to do so?

To be told that the fine print says I revoked this right is legally correct but ethically wrong if you are managing other people's money for an annual fee.

There is clearly a conflict of interest between the investor who wants his or her cash and the manager who wants to keep earning his fee.

Also on the same web page I see the Guardian Trust Property Fund has $12.5 million in cash, so what is the problem?

Could this all have something to do with the new owners of NZ Guardian Trust not wanting to lose funds under management after forking out all that cash?

Investors with long memories may remember how difficult it was to get out of the Australian unlisted property trusts just before they suspended redemptions indefinitely in 1990.

The reason? Their property valuations were way ahead of market reality and existing investors were penalising those who stayed in.


A. Perhaps I was too hard on the reader. But if so, I wasn't hard enough on her financial adviser.

If she wasn't clear when she went into the fund that she couldn't automatically get out whenever she wanted to, she should fire the adviser who put her into it.

Guardian Trust isn't blameless, either. On the firm's web page - www.guardiantrust.co.nz - it says its property fund is "a diversified, high-quality and liquid real estate portfolio." I would suggest it drops the word "liquid."

The web page also says investments in the fund have two-year terms, "and early withdrawal (if permitted) is subject to an early withdrawal fee of 1 per cent."

I suggest it adds something like, "Early withdrawals are often not permitted."

The fund's investment statement, which is given to every potential investor, makes the situation clearer, and adds that early withdrawal is at the trustees' discretion, says Guardian Trust's Tony Morgan.

Unfortunately, investment statements - which are shorter and usually more digestible than prospectuses - weren't around when this particular reader invested in the fund five years ago.

(Which leads to a suggestion that anyone who got into any investment more than a couple of years ago should phone and ask for an investment statement - just to be sure they understand what they're in.)

But the fund's prospectus - albeit perhaps hard to read - was available when the reader invested, and the application form explains the two-year term, says Mr Morgan.

The fund makes a point of keeping enough money in cash, or assets easily convertible to cash, so it can always meet redemptions at the end of people's terms, says Mr Morgan. Hence the current $12.5 million.

It doesn't, though, always have enough cash to let other investors pull out part way through. And, at the moment, it says it hasn't.

This brings us to a fundamental problem for property funds.

If they hold lots of cash, to allow easy redemptions, they're not just invested in property, but also quite heavily in cash, which would tend to lower their returns. (The Guardian Trust fund has, in fact, been criticised for holding too much cash, says Mr Morgan.)

Too little and, if more people than expected suddenly want their money out, the fund has to sell a property. The only way to be sure to sell property quickly is to slash prices, hurting every investor in the fund. Even then, it usually takes a month or two to settle everything.

One way to make it easy for a property fund investor to get out at any time is to list the fund on the stock exchange. Then, when one person sells shares to another, the fund is unaffected.

Guardian Trust looked into listing. But the way the market has been in recent years, if it had done so the value of the fund would have been significantly lower than the value of its properties, says Mr Morgan.

The firm concluded that it would hurt current investors to make the change. "If you want to invest in property at call, you pay a price for the liquidity," he says.

Or, to put it round the other way, if you want the higher return you get from tying up your money in any investment, you should be prepared to put up with the lower flexibility that comes with it.

In response to another point in your letter, Mr Morgan says the new owner of his firm, Royal & SunAlliance, has no direct say in how the property fund is run.

Guardian Trust has a board that includes two Royal & SunAlliance people, the managing director of Guardian Trust, and four independent directors.

On the Australian 1990 problem, Mr Morgan says the Guardian Trust fund is structured to avoid similar problems.

"We're conscious of things that have gone wrong in property funds in the past."

He adds that properties in the Guardian Trust fund are valued quarterly, "and we rotate our valuers."

Q. After following your column for several years I had formed the view that you were one of the few truly independent commentators on matters financial.

However, after your reply to the letter about the reader's problem with the NZ Guardian Trust Property Fund, I wonder whether you are not really a puppet of the unit trust industry after all!

Mary, shame on you for suggesting that it is acceptable for the Guardian Trust to automatically lock away a client's money for two years simply because it did not receive advice to the contrary!

Surely this is not fair, whether or not it is permitted in the fine print? And it only shows that NZ Guardian Trust has its best interest at heart, not those of its clients.

Do you have any money in this sort of product? Would you be happy if this happened to you? Of course not.

Is it not the Guardian Trust's responsibility to organise some sort of secondary market rather than just tell those clients to get stuffed?

I would be interested to hear what David Russell of the Consumers' Institute thinks of this sort of policy.

I know my bank has on occasion rolled over a deposit automatically when I was on holiday, then released it when I said that I needed it.

This would seem a far more customer-focused approach, despite the fact that banks have recently not been considered sensitive to clients of my means.

Now I'm not sure whether you are a "goody" or a "bandito."


A. Puppet? Goody? Bandito? All I want to be is fair.

Your letter raises a few points the previous one didn't, so let's look at them.

Yes, I have tied up money for various terms in the past. But I've never had the problem our reader had because I keep track of maturity dates.

Of course anyone can slip up on that sort of thing if something unforeseen happens. And Guardian Trust says it would take that into account. But our reader overlooked the date because she was overseas. Not a good enough excuse.

Guardian Trust doesn't think it should set up a secondary market.

"It's an investment for people who want to invest for two years," says Mr Morgan. As for the banks, you won't find many who will say in print that they'll break a term deposit with no penalty. Otherwise everyone would line up.

In fact, though, they do sometimes. And a cynic would say that they might be more willing to do it when interest rates are falling and they're happy to be out of an arrangement that's looking costly to them.

In any case, it must be easier for a bank to free up some money than for a property fund to sell property.

The Consumers' Institute's David Russell read through all the Q&As on this issue, and he has pronounced me a goody. Phew!

"When it says it's a two-year investment, it's a two-year investment," adds Mr Russell.

"While your bunny investor has every right to be angry, investors do have to carefully check the fine print. If they can't understand or haven't the staying power to wade through it, then they should seek independent advice."

Given that our reader did use an adviser, Mr Russell agrees with me that she may want to take up the issue with that adviser.

* Got a question about money? Send it to Money Matters, Business Herald, PO Box 32, Auckland; or e-mail: maryh@journalist.com. We won't publish your name, but please provide it and a (preferably daytime) phone number in case we need more information.