New Zealand's investment focus is beginning to change – and swiftly – from property to managed funds, according to leading investment management company, Harbour Asset Management.
"It's too early to track any kind of clear path yet but, anecdotally, managed funds are seeing a real rise in interest after the Government's moves to extend the brightline test from 5-10 years, capturing capital gains, and to remove tax deductibility for property investors," says Harbour Managing Director Andrew Bascand.
"The phone has been running hot and many of our new clients are investing profits from property sales; there is no doubt a large slice of New Zealand's investment savings is looking for a new home."
Statistics from the Financial Services Council show that 17.6 per cent of Kiwi investors hold units in managed funds, whereas only 13.1 per cent invest in direct property.
The latest FMA Investor Confidence report shows that while 88 per cent of Kiwis who invest in managed funds feel fairly or very confident about the state of New Zealand's financial markets (up from 78 per cent in 2017), the number of property investors feeling that way has declined marginally from its peak of 80 per cent in 2017 to 78 per cent.
Managed funds are even more ubiquitous when taking into account the number of Kiwis in KiwiSaver – which has 3 million members, according to the IRD.
"What is KiwiSaver but a form of managed fund – though the big difference is that most people can't access their money until they turn 65," says Bascand. "What we are seeing now is an inevitable shift in thinking about investment – people are really interested in learning more."
There are, says Bascand, six major benefits in joining a managed fund after the government's moves to dampen the property market.
Many property investors find themselves in New Zealand's top tax brackets – with the highest marginal tax rate set at 39 per cent and second highest 33 per cent. However, investors in PIE funds (Portfolio Investment Entities) are able to take advantage of lower tax rates – and are taxed at a maximum of 28 per cent. "That huge difference in tax rates can be a big advantage for higher income earners," says Bascand.
No bright-line test, no capital gains
Term deposit returns are typically sub-1 per cent; rental properties are subject to capital gains tax if sold within 10 years. Managed funds do not attract capital gains tax on profits from shares investment.
"For example, if we buy a company on the New Zealand stock exchange for $10 and sell it for $20, the $10 gain is tax-free," says Bascand. "We are only liable to pay tax on the dividends we receive. The rules are a little more complex for global shares but capital gains tax again does not apply."
Having to hold investment property for 10 years to avoid tax means it is an illiquid investment, says Bascand – and investors commonly want liquidity, even if it's just a small amount to subsidise NZ Super or pay an unexpected bill.
"The beauty of many managed funds is that liquidity is easy and can happen within a couple of days," says Chris Di Leva, Harbour Portfolio Manager. "Harbour funds don't charge transaction costs (or buy/sell spreads) to enter or exit funds so the exercise doesn't incur unexpected expenses."
Clients invested in managed funds are provided with a regular performance report, which usually include details of how well the fund has performed on a gross and net-of-fees basis every month. Guidance on how returns are calculated is provided by the regulator – so investors can have confidence comparing fund performance across funds and providers.
The Sorted Smart Investor tool, powered by the Commission for Financial Capability, publishes publicly available data on managed funds which allows investors to compare across the market. Kiwi charity Mindful Money has a fund checker tool on their website too, providing information for investors keen to choose funds which suit their values and ethics.
A key to managed funds is the ability to pick from a wide selection of asset classes, such as shares, bonds, cash or listed property, and across geographies, whether local or global. Each fund will hold a number of different investments to provide diversification and spread risks across multiple securities. Investors can build a portfolio out of different building blocks to suit needs and goals.
Multi-asset funds invest across different asset classes, geographies and sectors– designed so they are diversified enough to be an investor's entire portfolio. While investors see one fund, beneath the surface they own hundreds of shares and bonds. Investors seeking an all-in-one portfolio can access this diversification through multi-asset funds such as the Harbour Income Fund and the Harbour Active Growth Fund. They also pay monthly distributions, equal to 3.25 per cent per annum and 5 per cent per annum respectively for investors who want regular cash flow without the stress of timing the market or paperwork.
Di Leva says an often-asked question is what happens to my money if the company goes bust: "The answer is simple – it will remain where it has always been, safely held by the fund's custodian, who acts to safeguard investor assets.
"When an investor invests in one of our funds, the money is paid to the custodian and is not held by the fund manager," he says. "When we buy or sell shares in a company, a custodian is behind the scenes making sure all the money is correctly transferred and accounted for.
*This does not constitute advice to any person. harbourasset.co.nz/disclaimer