As an Authorised Financial Advisor, John is qualified to provide advice on Kiwisaver, Managed Funds and investment planning.
Diversification
Diversification is an essential tenet of investing and managing risk. This should include holding an array of assets within asset classes, across asset classes and across geographies. The assets can be anything from financial assets - cash, fixed income investments, shares/equities/stocks, Kiwisaver and Managed Funds – to property and collections (such as art, antiques, wine or cars).
Investment in collections can be risky, requiring specialist knowledge. For most of us, property and financial assets will form the core of our investment strategy.
Property
Property has many advantages, as home owners we are familiar with property, it is tangible (bricks and mortar, weatherboard) and we tend to take an interest in the local property market and prices (more so than the performance of companies and corporates).
We are also likely to have friends, colleagues and acquaintances who have experience with the property market, including home-owners, residential property investors, builders and others involved in the industry. In contrast, New Zealanders are generally less willing to discuss their financial position and experiences.
Property generally provides a superior return to cash and bonds and in recent decades has given growth assets, such as shares and equities, a run for their money. Investors are also able to leverage when investing in property, with banks and other lenders willing to lend up to 70% for investment properties and up to 95% for owner-occupied property. Property is a tangible asset and information on prices and the market is readily available, meaning that Kiwis are quite comfortable investing in real estate.
Being tangible, investors may feel more secure holding property during a downturn. However, investing predominately in property poses an investment concentration risk, particularly as it can take a while to sell property in market downturns. Investors also need to be aware of the costs associated with the purchase and sale of real estate and the risks from physical events such as fire, earthquake and deterioration in the asset. Leveraging is also a risk – while gains are amplified in a rising market, they are equally magnified in a declining market.
Financial Assets
The process of spreading your money across a range of investments is called portfolio diversification. It can be difficult for investors to achieve a reasonable level of diversification through direct investment in financial assets, unless they have a significant portfolio. While management fees are avoided, for smaller investors the costs of trading in smaller packages of shares and bonds will mount up.
It can also be difficult for an individual investor to research and analyse investment options, manage to an asset allocation strategy, measure the overall performance of their investment portfolio and manage their tax, particularly where they have multiple investments generating differing returns.
For those investors who have sufficient funds and who are interested in playing an active role in their asset allocation, a company offering financial advice and broking services is a good option. Many advisers will offer a wrap platform which administers the purchase and sale of investments through a custodian. This can provide access to a wide range of markets, fee and brokerage savings, administrative efficiency and transparent reporting.
For others, direct investment in Kiwisaver and managed funds offer access to qualified experts with dedicated resources to manage and grow your investments. As an Authorised Financial Advisor, I am qualified to provide advice in relation to managed funds and investments. I believe that Kiwisaver and managed funds provide benefits that would otherwise be out of reach for many investors seeking a diversified portfolio.
Managed Funds
A managed fund is an investment vehicle through which investors’ money is grouped to create a single fund for the purchase of a pool of investments, which are managed on their behalf by a fund manager. Investors can select a fund which has a broad allocation of assets suited to their investment profile and risk tolerance, but they do not have day to day control over the fund’s investment. The mix of investments will be communicated by the Fund Manager, through brochures and disclosure statements, which will be considered by the investor and their financial advisor when selecting a fund.
The beneficial interest in the investments of which the fund is comprised is divided into units that are issued to each investor. Each of these units is equal to the others in the fund, in terms of its rights and entitlements. They will go up and down in value depending on the performance of the assets that make up the fund. This in turn will reflect how the fund is composed, across income assets (cash and bond) and growth assets (shares, property and other growth investments).
The long-term return for funds with a high proportions of growth assets would be expected to be higher than for a fund that contains a high proportion of income assets. However, the nature of growth assets is that their performance is likely to be much more volatile than that of income. Growth assets can react quite sharply in response to changes in market sentiment, which is in turn driven by economic, business and geo-political news and rumours, and more recently health concerns.
It is therefore important to select a class of managed fund appropriate for your risk profile and planning horizon:
This should form part of a financial plan taking account of your planning horizon and risk profile, so that you are not tempted to exit the fund at the wrong time, in response to volatility that you have found hard to stomach.
Managed funds have a number of advantages, including:
- Access to international markets and investments that an individual investor would not otherwise have access to
- A professional fund manager and investment management team
- Investors are taxed at their own Prescribed Investor Rate (PIR), with a maximum rate of 28%
Your PIR is worked out on your taxable income in the last two income years and may be lower than your marginal tax rate
Disadvantages of managed funds can include high management fees and the possibility of poor management, although:
Fees should form part of your consideration, along with fund performance and management style (particularly whether the fund is passively or actively managed). Managed funds also have rules for how their funds can be spread across different types of investments, including minimum standards of disclosure which are monitored by the Financial Markets Authority as part of the licensing of fund managers and their supervisors.
There are two broad types of management style:
Overall, a managed fund provides benefits that would otherwise be out of reach for many investors seeking a diversified portfolio.
While there are on-line options for investing in managed funds, it is important that investors have a plan and stick to it, unless there are changes in their circumstances that warrant a change in their plan. Having a financial advisor can help you design and implement a plan, as well as providing the support and confidence to stick to it through the business cycle - for there will be ups and downs.
Kiwisaver
Kiwisaver is a type of managed fund with a set of rules designed to ensure the funds are held through to retirement, with some exceptions around first home purchase and financial hardship.
The scheme came into effect in 2007, following the passing of the Kiwisaver Act 2006. It provides Kiwis with a voluntary savings scheme to help them save for their retirement, allowing them to choose one of a number of registered private providers for their Kiwisaver investments. The scheme has a number of significant benefits, including:
Other benefits include:
There are three ways to join KiwiSaver:
Once enrolled in Kiwisaver, members have to contribute for at least 12 months. After 12 months, members have the option to take a break from saving (called a ‘savings suspension’). Investors are only able to be enrolled with one Kiwisaver provider, although they may be able to invest in more than one KiwiSaver scheme with that provider.
There is no minimum initial investment to open a Kiwisaver account and there is no minimum ongoing annual contribution, unless the Kiwisaver member is in paid employment. In this case, the employer will administer a minimum employee contribution of 3% of gross salary or wages, unless the employee has opted out. Employees can elect to contribute at the minimum rate of 3%, or choose a higher rate of either of 4%, 6%, 8% or 10% of gross salary or wages.
Kiwisaver members also have the ability to make voluntary contributions at any time, either directly through their KiwiSaver provider or through Inland Revenue
KiwiSaver funds are usually Portfolio Investment Entities (PIEs) and so distributions are taxed at the individual's Prescribed Investor Rate (PIR). The fund itself will pay the tax on behalf of the investor.
For more information on Kiwisaver, Homestart and Kiwibuild see [Home Loans].
Exchange Traded Funds
Like Kiwisaver, Exchange traded funds (ETFs) are a type of managed fund. They share many of the characteristics of passively managed funds in that they usually track a market index (hence the name) and are not actively managed (they do not try and provide a market beating return). However, they have a couple of distinct characteristics:
Passively managed funds differ from ETF's in that passively managed funds are generally composed of several asset classes and underlying funds. This means that you are more likely to be able to find a passively managed fund that is tailored to the needs of your investment profile. In contrast, investing in ETF's is likely to require you to design an overall portfolio to achieve diversity across asset types, regions and sectors to match your investor profile. This would involve investing in sufficient single-asset ETF's to construct a portfolio aligned to your investment and risk profile.
While ETF's have a low cost structure, they do have establishment fees and fund charges, which are generally comparable to passively managed funds. ETF's would be suited to people who want to take an active interest in their portfolio, using various ETFs to get a spread of companies across asset classes and sectors of interest to the particular investor.
Diversification
Diversification is an essential tenet of investing and managing risk. This should include holding an array of assets within asset classes, across asset classes and across geographies. The assets can be anything from financial assets - cash, fixed income investments, shares/equities/stocks, Kiwisaver and Managed Funds – to property and collections (such as art, antiques, wine or cars).
Investment in collections can be risky, requiring specialist knowledge. For most of us, property and financial assets will form the core of our investment strategy.
Property
Property has many advantages, as home owners we are familiar with property, it is tangible (bricks and mortar, weatherboard) and we tend to take an interest in the local property market and prices (more so than the performance of companies and corporates).
We are also likely to have friends, colleagues and acquaintances who have experience with the property market, including home-owners, residential property investors, builders and others involved in the industry. In contrast, New Zealanders are generally less willing to discuss their financial position and experiences.
Property generally provides a superior return to cash and bonds and in recent decades has given growth assets, such as shares and equities, a run for their money. Investors are also able to leverage when investing in property, with banks and other lenders willing to lend up to 70% for investment properties and up to 95% for owner-occupied property. Property is a tangible asset and information on prices and the market is readily available, meaning that Kiwis are quite comfortable investing in real estate.
Being tangible, investors may feel more secure holding property during a downturn. However, investing predominately in property poses an investment concentration risk, particularly as it can take a while to sell property in market downturns. Investors also need to be aware of the costs associated with the purchase and sale of real estate and the risks from physical events such as fire, earthquake and deterioration in the asset. Leveraging is also a risk – while gains are amplified in a rising market, they are equally magnified in a declining market.
Financial Assets
The process of spreading your money across a range of investments is called portfolio diversification. It can be difficult for investors to achieve a reasonable level of diversification through direct investment in financial assets, unless they have a significant portfolio. While management fees are avoided, for smaller investors the costs of trading in smaller packages of shares and bonds will mount up.
It can also be difficult for an individual investor to research and analyse investment options, manage to an asset allocation strategy, measure the overall performance of their investment portfolio and manage their tax, particularly where they have multiple investments generating differing returns.
For those investors who have sufficient funds and who are interested in playing an active role in their asset allocation, a company offering financial advice and broking services is a good option. Many advisers will offer a wrap platform which administers the purchase and sale of investments through a custodian. This can provide access to a wide range of markets, fee and brokerage savings, administrative efficiency and transparent reporting.
For others, direct investment in Kiwisaver and managed funds offer access to qualified experts with dedicated resources to manage and grow your investments. As an Authorised Financial Advisor, I am qualified to provide advice in relation to managed funds and investments. I believe that Kiwisaver and managed funds provide benefits that would otherwise be out of reach for many investors seeking a diversified portfolio.
Managed Funds
A managed fund is an investment vehicle through which investors’ money is grouped to create a single fund for the purchase of a pool of investments, which are managed on their behalf by a fund manager. Investors can select a fund which has a broad allocation of assets suited to their investment profile and risk tolerance, but they do not have day to day control over the fund’s investment. The mix of investments will be communicated by the Fund Manager, through brochures and disclosure statements, which will be considered by the investor and their financial advisor when selecting a fund.
The beneficial interest in the investments of which the fund is comprised is divided into units that are issued to each investor. Each of these units is equal to the others in the fund, in terms of its rights and entitlements. They will go up and down in value depending on the performance of the assets that make up the fund. This in turn will reflect how the fund is composed, across income assets (cash and bond) and growth assets (shares, property and other growth investments).
The long-term return for funds with a high proportions of growth assets would be expected to be higher than for a fund that contains a high proportion of income assets. However, the nature of growth assets is that their performance is likely to be much more volatile than that of income. Growth assets can react quite sharply in response to changes in market sentiment, which is in turn driven by economic, business and geo-political news and rumours, and more recently health concerns.
It is therefore important to select a class of managed fund appropriate for your risk profile and planning horizon:
- Defensive and conservative funds offer stability, but over the long term a lower expected return
- Balanced, growth and aggressive funds offer increasingly larger shares of growth assets, such as shares, property and other growth assets. These in turn will generate higher expected returns but at the risk of greater volatility.
This should form part of a financial plan taking account of your planning horizon and risk profile, so that you are not tempted to exit the fund at the wrong time, in response to volatility that you have found hard to stomach.
Managed funds have a number of advantages, including:
- Diversification – by pooling money into a single fund, the fund manager is able to invest in a wide array of assets across asset classes and geographies
- Buying strength - the buying strength and networks of an investment firm provide:
- Access to international markets and investments that an individual investor would not otherwise have access to
- A professional fund manager and investment management team
- Convenience and simplicity - the fund manager organises the buying and selling of assets, paperwork, rights issues, capital gains, dividends and rents etc
- Flexibility - most managed funds have very low minimum amounts for contributions, or withdrawals, from the fund at no cost. This allows investors to deposit or withdraw funds to fit in with their plans and needs, providing much of the convenience of a bank account
- Security - funds are held in trust meaning that there is a separate supervisor making sure that the funds go where the provider says they will. This means that members funds should not be affected (beyond market performance) if the provider were to get into financial difficulties. In addition, the schemes must generally be licenced and have a number of conditions that they must fulfil which are overseen by the Financial Markets Authority
- Many managed funds are registered as Portfolio Investment Entity (PIEs), which benefit from:
- Investors are taxed at their own Prescribed Investor Rate (PIR), with a maximum rate of 28%
Your PIR is worked out on your taxable income in the last two income years and may be lower than your marginal tax rate
- Simplicity - once the investor understands how managed funds operate, their simplicity and flexibility makes them a increasingly popular option for investors seeking to access the benefits of a diversified portfolio.
Disadvantages of managed funds can include high management fees and the possibility of poor management, although:
- Licencing under the Financial Markets Conduct Act significantly reduces the chances of mis-management and fraud. This means that the Financial Markets Authority licenses the fund manager and their supervisor and monitor whether they are meeting the standards required by law
- The fees are transparent and returns are published after fees have been deducted, providing visibility on the return to the investor.
Fees should form part of your consideration, along with fund performance and management style (particularly whether the fund is passively or actively managed). Managed funds also have rules for how their funds can be spread across different types of investments, including minimum standards of disclosure which are monitored by the Financial Markets Authority as part of the licensing of fund managers and their supervisors.
There are two broad types of management style:
- Actively managed funds which attempt to provide a market beating return
- Passively managed funds which track a market index, or sector, thereby providing a near-market return (fees have to be taken into account). Passive fund management is generally simpler, so fees are generally lower.
Overall, a managed fund provides benefits that would otherwise be out of reach for many investors seeking a diversified portfolio.
While there are on-line options for investing in managed funds, it is important that investors have a plan and stick to it, unless there are changes in their circumstances that warrant a change in their plan. Having a financial advisor can help you design and implement a plan, as well as providing the support and confidence to stick to it through the business cycle - for there will be ups and downs.
Kiwisaver
Kiwisaver is a type of managed fund with a set of rules designed to ensure the funds are held through to retirement, with some exceptions around first home purchase and financial hardship.
The scheme came into effect in 2007, following the passing of the Kiwisaver Act 2006. It provides Kiwis with a voluntary savings scheme to help them save for their retirement, allowing them to choose one of a number of registered private providers for their Kiwisaver investments. The scheme has a number of significant benefits, including:
- A government annual contribution of up to $521 (for contributing members aged 18 or over)
- Employer contributions of at least 3% of employees' gross salary or wages (in addition to the employees' own contributions)
- Access to Kiwisaver savings for the purchase of a first home, contingent on at least three years membership. In some circumstance members may be able to use savings even if they have owned property previously
- The KiwiSaver HomeStart grant - first home buyers may be eligible for a grant of up to $5,000 towards buying an existing home, or up to $10,000 towards buying a new home or land to build a new home on
- It is possible to access the funds early in the case of financial hardship.
Other benefits include:
- Ease and simplicity - including automatic enrolment for new employees and deduction of contributions, which has helped contribute to the development of savings habit for some Kiwisaver investors
- Portability - if members' change jobs or leave the workforce their KiwiSaver account moves with them
- Access to the benefits of managed funds in a specifically legislated and well publicised environment, with which Kiwis are becoming familiar.
There are three ways to join KiwiSaver:
- Kiwis not already enrolled in Kiwisaver will automatically be enrolled when starting a new job. If automatically enrolled, new employees can choose to opt-out, but must do this within 8 weeks of commencing
- Investors can apply to open a Kiwisaver account through their employer
- Investors can apply by to open a Kiwisaver account by contacting a KiwiSaver provider directly, this includes those who are self-employed and those not in paid employment
Once enrolled in Kiwisaver, members have to contribute for at least 12 months. After 12 months, members have the option to take a break from saving (called a ‘savings suspension’). Investors are only able to be enrolled with one Kiwisaver provider, although they may be able to invest in more than one KiwiSaver scheme with that provider.
There is no minimum initial investment to open a Kiwisaver account and there is no minimum ongoing annual contribution, unless the Kiwisaver member is in paid employment. In this case, the employer will administer a minimum employee contribution of 3% of gross salary or wages, unless the employee has opted out. Employees can elect to contribute at the minimum rate of 3%, or choose a higher rate of either of 4%, 6%, 8% or 10% of gross salary or wages.
Kiwisaver members also have the ability to make voluntary contributions at any time, either directly through their KiwiSaver provider or through Inland Revenue
KiwiSaver funds are usually Portfolio Investment Entities (PIEs) and so distributions are taxed at the individual's Prescribed Investor Rate (PIR). The fund itself will pay the tax on behalf of the investor.
For more information on Kiwisaver, Homestart and Kiwibuild see [Home Loans].
Exchange Traded Funds
Like Kiwisaver, Exchange traded funds (ETFs) are a type of managed fund. They share many of the characteristics of passively managed funds in that they usually track a market index (hence the name) and are not actively managed (they do not try and provide a market beating return). However, they have a couple of distinct characteristics:
- They are listed on a regulated market (you can buy into an ETF in the same way you would buy shares)
- They tend to be single-asset funds (for example, cash, bonds, shares, property trusts)
Passively managed funds differ from ETF's in that passively managed funds are generally composed of several asset classes and underlying funds. This means that you are more likely to be able to find a passively managed fund that is tailored to the needs of your investment profile. In contrast, investing in ETF's is likely to require you to design an overall portfolio to achieve diversity across asset types, regions and sectors to match your investor profile. This would involve investing in sufficient single-asset ETF's to construct a portfolio aligned to your investment and risk profile.
While ETF's have a low cost structure, they do have establishment fees and fund charges, which are generally comparable to passively managed funds. ETF's would be suited to people who want to take an active interest in their portfolio, using various ETFs to get a spread of companies across asset classes and sectors of interest to the particular investor.