Cash Investments

This information has been provided by the market regulator, the Financial Markets Authority

For advice about your personal situation, we recommend you speak to an AUTHORISED FINANCIAL ADVISER.

Cash investments are a common way to save money. They’re considered relatively safe because you’re promised a fixed interest rate. But they’re not always the best option – particularly if you’re saving for retirement. Interest rates tend to be low and your money might not grow in value as much as you need it to. 

Types of cash investment

Savings accounts and term deposits with a bank, credit union or building society are the most common ways to invest your cash. Another way is through a managed fund (this includes KiwiSaver) which pools together money from individuals for investments, managed by a fund manager.

Savings accounts and term deposits typically guarantee a set level of interest each year. Most basic savings accounts allow you to withdraw your money whenever you want it. A term deposit offers a higher interest rate but you may have to forgo your interest or get lower interest if you withdraw your money before the term finishes. Term deposits can range from three months to five years.

The FMA doesn’t regulate savings accounts or term deposits but they do regulate managed fund providers.

Portfolio Investment Entity (PIE) funds are a type of managed fund offered by banks

Most banks now offer PIE funds, a type of managed fund that offer investors lower tax rates. If you’re considering investing in a PIE fund, make sure you check the investment terms. There’s usually a penalty for accessing your money early, or in some cases early access may not be possible.

You should also see how the PIE fund is invested. The main advantage of managed funds is that your money is spread across a wide range of investments. This is lower risk because you don’t have all your eggs in one basket. However, many bank PIE funds will only invest in their own accounts.

Things to look out for

Cash investments are a good option if you need to access your money quickly, or if you need your investment to provide a regular income. There are some things you should consider before you invest.

Your investment may not increase by as much as the cost of living

If you have a long-term goal, such as saving towards your retirement, there’s a risk that your money won’t grow as fast as the cost of living. This is known as inflation risk. If inflation increases more than the returns on your investment, your money will have less buying power when you need it.

Fees vary between providers

Providers’ fees vary. The fees also depend on the accounts you choose. Generally, accounts offering higher interest also tend to have conditions attached, such as maintaining a minimum deposit in your account. There may also be penalties for withdrawing money early – such as a break fee, or reduced interest on early withdrawals.

Understand what fees you’ll be paying before you sign up to any product. Because fees are paid out of your investment, differences in fees and charges can have a big impact on your investment over the long term. It’s always a good idea to shop around and get the lowest fees you can.

Diversify to reduce your risk

Putting your money with banks is considered one of the safest forms of investment in New Zealand. But there’s no guarantee the banks won’t fail. A good rule is to spread your money across different cash investments. Holding other types of investments such as bonds, property or shares can help reduce the risk of your money’s value being eroded by inflation. If you’re saving for retirement, contributing regularly to KiwiSaver is an easy way to spread your investments.

TIP: If you’re investing in cash through a managed fund, like KiwiSaver, it’s worth checking how the provider is investing your money. If the fund is investing in one type of bank deposit account (or a high proportion of assets in that account), you have more risk of losing your money than if it’s spread across different bank deposit accounts.  

Where to get more information

Sorted has further information about investing in bank deposits.

For advice about your personal situation, we recommend you speak to an AUTHORISED FINANCIAL ADVISER.

Bonds

This information has been provided by the market regulator, the Financial Markets Authority

For advice about your personal situation, we recommend you speak to an AUTHORISED FINANCIAL ADVISER.

Bonds generally offer more stable returns and lower risks than investments like property or shares.  But some bonds are risker than others.

Make sure you understand these risks.

Key things to know before you invest

  • If a bond’s been on the market a long time, its price or features may have changed since the product disclosure statement was published
  • Credit ratings should only be used as an initial assessment of risk
  • You may lose money if you need to sell your bonds early.

What is a bond?

When you buy a bond, you’re lending money to a bond issuer – usually a government, council or company – for a set period of time (the term). The term is fixed by the issuer and can range between one and 30 years. They’re often known as ‘fixed interest’ investments.

The bond’s interest rate, also known as a coupon, is fixed at the time of issue. Interest is paid through the bond’s lifespan. At the maturity date, you’ll also be paid the face value of the bond.

You can only buy or sell bonds through a sharebroker, or an online dealing service.

Things to look out for

Find out if the pricing or any other key features of the bond have changed – product disclosure statements (PDSs) don’t need to be kept up-to-date. A sharebroker will be able to help you with this.

Credit ratings should only be used as an initial assessment of risk – Credit ratings help you understand how likely it is you’ll get your money back at maturity, and that interest will be paid on time. Ratings are issued by independent agencies such as Standard & Poor’s, Moody’s and Fitch. However, you need to be aware that these agencies have different credit rating systems, and they’re only one factor you need to take into account.

Read this Reserve Bank bulletin and our credit ratings page to learn more.

When comparing bonds, take care as the credit rating doesn’t always apply to the issuer of the bond. It can apply to the bond itself or to the issuer’s holding company. There may also be no credit rating.

All bonds have different risks – There is a section in the PDS called ‘specific risks’. This gives you an idea of what can significantly increase the risk of you losing money on your investment. These risks will be different for each bond.

If you buy bonds without a maturity date (perpetual bonds), you could be exposing yourself to risks for a longer time.

Check the information in the ‘key terms of the offer’ and ‘key features’ sections of the PDS.

Selling your bonds

You can usually sell listed bonds by trading on bond markets, such as the NZX Debt Market.

If a bond’s listed, you’ll see its value and the number of trades. The more trades there are, the easier it’s likely to be to sell your bonds. A market with few potential buyers means you could struggle to sell your bonds at a reasonable price.

If a bond’s not listed, you’ll need to take extra care to determine whether the price being charged is appropriate. Check the financial information in the PDS and on the bond register entry and seek professional advice if necessary.

Ways you can reduce your risk

Bond laddering – Choosing bonds with different maturity dates gives you access to cash at different times. It also reduces the chance that all your bonds mature at a time when interest rates may be high and yields are low, which means you’ll make less money on your investment.

Diversification – Choosing different types of bonds increases the chance that some will perform well when others don’t. Consider bonds that fit your financial goals and tolerance for risk. This could include a mix of government and corporate bonds, bonds that mature at different times, or more complex bonds.

How you can make or lose money when selling your bond

Your biggest risk when selling bonds is what has happened to interest rates since you bought them.

If your bond’s paying a higher interest rate than current rates, it will be more attractive and you may receive more from the buyer than what you paid. If it’s lower, you may receive less.

The maturity date also matters as this determines how much longer a buyer will receive interest payments.

For investors, the overall yield (or return) is important. This takes into account the interest rate, maturity date, and the price of a bond. Working out the price and yield of bonds can be complex and bond traders use sophisticated computer programmes to do this.

Here is a simplified example of how you will be exposed to bond risks:

If you buy a $1,000 bond with a 10% coupon rate, you are agreeing to receive $100 in interest, or a 10% yield.

Should interest rates rise, other bonds will come onto the market with higher coupon rates. So your bond may be competing with a $1,000 bond with a 12% coupon rate, which is a 12% yield.

To get a higher yield from your bond, buyers will offer less for it. If they buy at $800, for example, they will still get your $100 interest, which is a 12.5% yield.

Where to get more information

We’ve published information about more complex bond products in our capital notes guide.  You can also read about different types of bonds. 

For advice about your personal situation, we recommend you speak to an AUTHORISDED FINANCIAL ADVISER.

Adviser Investment Day update

We promised to report back to you following our recent attendance at the bi-annual Adviser Investment Day in Auckland.  Our investment manager NZ Funds Management Ltd hosts these events for the Authorised Financial Advisers it works with around the country. 

Lee and I also use these days to meet our obligations towards our Continuing Professional Development. 

 

NZ Funds’ Chief Investment Officer (CIO) Michael Lang has recently returned from a global funds manager conference in Hong Kong and as expected he spoke about the slowing growth rate of the Chinese economy, which has been slowing for a number of years now.  How fast this is occurring no one outside of China knows.

NZ Funds’ view is that China needs to devalue its currency or tough out a recession.  With China now integrated into the world’s trading system, whatever happens next in China will be felt by all. 

Another topic was oil prices.  Global share markets have been tracking the collapsing price of oil.  Over the past 12 months oil has fallen 38% driven by weak demand and excess supply. 

There are also signs of a decline in company profits in the United States.  At the same time the central bank (the Federal Reserve) has decided to raise interest rates, which will slow the economy and put further downward pressure on company profits.  Nevertheless certain sectors continue to grow, and there is evidence that the US economy is continuing to grow. 

Staying the course.

Despite the concerns there are a number of reasons to feel comforted, especially as you have been working with an Authorised Financial Adviser and are using our LifeCycle aged based asset allocation approach in your KiwiSaver.

Our top 5 reasons are:

  1. Our portfolios are widely diversified
  2. Our portfolios are actively managed by global experts
  3. Our clients own few emerging market assets
  4. Our client portfolios have downside mitigation strategies
  5. You have a plan – stick to it.

Despite the more challenging environment nothing fundamentally has really changed.  Our collective focus remains on ensuring that each of our clients holds a well diversified and actively managed portfolio of quality assets, matched to an up-to-date financial plan. 

History tells us that in the long-run, equity markets will do just fine.  In the short-run, however, the prospect of losses can create a lot of havoc. 

If you would like to revisit your plan to ensure that it remains appropriate to your situation and tolerance to risk we would love to hear from you. 

 

Are all of your KiwiSaver contributions getting into your KiwiSaver account?

Your KiwiSaver contributions are deducted from your after tax pay and retained by your employer who is then obliged to send them to IRD on 20th of each month when filing their PAYE return.  Your employer is also obliged to contribute a minimum of 3% of your gross earnings (less a little tax), and this is also required to accompany your own contributions on 20th of each month.

Since the scheme started in 2007 employers have failed to pay over $10m in KS contributions for over 46,000 employees, according to figures obtained by Radio NZ from IRD.

Employees who are in KiwiSaver rely on their employers to pass their own contributions, as well as the 3% minimum (less tax) businesses are legally required to pay, to IRD each month.  IRD then pass this total sum on to your KiwiSaver provider.

 

It seems that some employers are not sending your money to IRD.

 

Most KiwiSaver schemes provide members with password protected electronic access to your own KiwiSaver account.  Keep vigilant by logging in to ensure that two regular payments pop up every month.  Bear in mind that generally payments take around three months to come from an employer, via IRD, to the KiwiSaver scheme provider. 

 

Obviously missing out on KiwiSaver contributions can have a huge impact down the track.  If you are robbed of $1,000 at age 20 it’s likely to add up to $30,000 or more at retirement.

 

If you are concerned as to whether or not your employer is passing on all of your contributions you can sign up for myIR with Inland Revenue so that you can view all transactions.  Be aware of the time lag. 

 

If you are still concerned you can speak with your employer and/or contact us for assistance.  We are definitely on your side.  

Click to read the full article from Tamsyn Parker:  Companies fail to hand over KiwiSaver cash  

 


 

 

Fund Manager’s Insight

MPS – Global Income, Core Inflation, Dividend & Growth Portfolios plus NZ Funds KiwiSaver Scheme Growth Strategy

 

Global Income Portfolio

The Portfolio returned -0.37% in December 2015, taking annual performance to 1.03%.

Low interest rates – the ‘new normal’

PIMCO, one of the managers we have used in this Portfolio, coined the phase the ‘new normal’ to explain the economic environment since 2008. This term suggests we are in a period of relatively low (but positive) economic growth and, importantly, low interest rates. In fact interest rates are back to their ‘old normal’. Prior to the period of high inflation in the 1970s, interest rates were typically around 3%. This is likely to be the average return achieved over the next ten years.

Over the past year we have refocused the Portfolio to this new reality. Around 70% of the Portfolio is invested in global investment grade companies. This exposure is both direct and through an external manager, Wellington. This has an expected yield of 6.0%. A further 20% of the Portfolio is invested in United States mortgage-backed bonds. This is one of the few fixed interest asset classes which we feel is offering higher than average risk adjusted returns. This exposure is through three managers – Doubleline, Blackrock and Semper. This portion is expected to yield 7.7%. The remaining 10% of the Portfolio is invested in an alternative manager, Harness, that looks to add value through active foreign currency management.

In developing this new strategy, we knew the Portfolio would be vulnerable to an increase in interest rates and/or an increase in credit spreads (this is the difference between the yield on a corporate and a government bond). This vulnerability was only an issue of timing, for as long as the bonds did not default, the initial unrealised loss would be offset by higher returns going forward. Unfortunately, just after the Portfolio was restructured, both interest rates and credit spreads widened resulting in an unrealised loss. However this initial loss is now resulting in a higher running yield on the Portfolio, with the return achieved over the last three months equal to an annualised return of over 6% pa which is its expected running yield.

 

Core Inflation Portfolio

The Portfolio returned -1.36% in December 2015, taking annual performance
to -0.31%.

Is low inflation here to stay?

The past year has seen inflation remain relatively low with New Zealand’s Consumers Price Index (CPI) increasing by just 0.4% in the year to September 2015. There are two schools of thought regarding why we may be experiencing low inflation. One suggests we are in a period of structurally low inflation as competitive forces drive prices lower. The development of the internet (which
removes some of the middlemen) and the emergence of cheaper labour from developing nations are the major explanations for this theory. The other school suggests that the world has been hit by a number of one-off shocks which have produced this low inflation result. The recent decline in the price of oil and other commodities would be among these shocks. As always, the truth is likely to
be somewhere in the middle, but the recent rise in global house prices shows that inflation is still alive, just not in the area of consumer prices. Therefore it is important not to become complacent as inflation could surprise on the upside just as it has surprised on the downside in the past year.

To mitigate the impact of inflation on your investments, the Portfolio looks to hold a diversified range of assets which should perform well in times of inflation. Over the past year, returns from these diversified assets have been mixed. The Portfolio has experienced below average returns from both fixed interest and shares, consistent with returns from these asset classes. The exposure to
foreign currency was beneficial but this has been more than offset by declines in commodities, particularly oil. While the aggregate result has been disappointing this year, it is consistent with the components of the inflation index. This gives us confidence that the construction of the Portfolio is correct for its objective. By definition, a sudden rise in the inflation rate will be due to a shock. It is important that the Portfolio is correctly constructed prior to the occurrence of any shock.

Core Inflation Portfolio

 

Dividend & Growth Portfolio

The Portfolio returned 1.76% in December 2015, taking annual performance
to 13.00%.

2015 – bouquets and brickbats

The Portfolio had another solid year to date in 2015, posting a return of 13.00%. This was helped by good performance from the New Zealand share market, offset to some extent by a weaker result from its Australian investments.

The biggest contributions to the Portfolio’s return came from two companies involved in the energy sector which were unaffected (even buoyed perhaps) by the lower global oil price. Z Energy continued to grow its earnings and announced a transformational takeover of Caltex New Zealand, while New Zealand Refining benefitted from a positive external environment and changes which management have made there over the past couple of years.

Meridian Energy remains the largest holding in the Portfolio and continues to perform well. Its earnings and dividend should continue to grow modestly over the next couple of years.

The biggest detractors from performance were two media companies, TwentyFirst Century Fox and Sky Network Television. Both are facing disruption from internet TV providers like Netflix. We are conscious of the threat to these businesses and continue to monitor the situation closely.

Rio Tinto shares suffered as the iron ore price continued to fall, but the company remains a best-in-class miner and should happily ride out this commodity cycle, as it has done many times before.

As you may know, we look to invest the Portfolio in a small number of high-quality companies and monitor them closely but hold them for the long term. As per this strategy, there were relatively few changes to the Portfolio during the year. We added two companies and sold out of four.

 

NZ Funds KiwiSaver Scheme Growth Strategy

The Strategy returned -4.24% in December 2015, taking annual performance
to 7.13%

2015 – return versus risk

After some years of strong returns, global share markets reported reasonably muted returns over 2015. To the end of November, global share markets rose on average by just under 5%. While this may seem disappointing, it actually bodes well for the future, as in previous years share market returns had outpaced the profit growth of the underlying companies. Over the year profit growth caught up, improving the valuation metrics of share markets.

One of the strongest regions over the 11 months to 30 November2015 was Europe which was up 15% on average. The Strategy maintained a large exposure to this region and this was one of the reasons the Strategy achieved a better return. Similarly, one of the worst performing regions was emerging markets (down 3.7%) which the Strategy had minimal exposure to over the year. Another major reason for the Strategy achieving a higher return was the active management of foreign currency exposure. Over the year we reduced the foreign currency hedging in the Strategy, taking active exposure to principally the United States dollar. This was beneficial to the Strategy.

Investing is not all about achieving high returns, as these can be followed by large negative returns. Managing risk is just as important. Over the year we were particularly pleased at our ability to preserve capital during share market declines. The largest decline the Strategy experienced over the 11 months to November2015 was 7.6%, compared with global share markets which on average experienced a decline of 13%. This means you, the client, has a smoother investment experience as well as achieving a higher return than a passive investment in global share markets.