Kiwi Saver, Mary Holm financial writer and columnist

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Mary’s Q&A column appears in the Business section of the Weekend Herald. Mary was a finalist for the "Best Columnist – General" award for this column in the 2014 Canon Media Awards.

NZ Herald 29 October 2016

Q&As: Why I won't publish list of top-performing share funds
- What happens to KiwiSaver at 65 ...
- ... but what if you've been in the scheme less than 5 years?
- Bad news for travelling teacher about NZ Super eligibility

Question: I would like to comment on your advice to the investor last week who was asking whether to ignore predictions of an imminent share market crash.

You show statistically that most active share fund managers cannot accurately predict when a market is going to fall or when it is going to rise again, so investing in an index fund is your preferred option.

The problem with showing the results of a statistical analysis is that only the average performance of those funds is shown to make your point. It is equally important to note that 50 per cent of those funds performed above that average and 50 per cent performed below that average.

Even more importantly the top 10 per cent of those investment funds will have performed well above that average - in some cases consistently returning double digit returns over a reasonable number of years. The key to identifying these top performing fund managers is available with a little research on the internet.

It would be great if occasionally it was recognized in your column that there are a number of better than average investment funds available as an option for your readers to consider.

Answer: Ouch! You're right, there will always be above-average funds - by definition. And lists of these funds are available. But there's not much point in my naming them unless I feel confident they will stay above average. And I don't.

Share funds are not like, say, athletes or authors. We expect Olympic medallists to keep performing really well. We expect book award winners to keep writing really well. But we shouldn't expect top-performing share funds to stay at or near the top.

I've seen various research on this over the decades, but the only fairly recent study I can find is by Vanguard. Given that it's a huge US index fund manager, you and others might dismiss its findings. But maybe active managers haven't published similar research because they don't like what it shows - that index funds are a better bet.

If you or other readers can come up with other reputable research on this I would love to hear about it. Meantime, let's go with the Vanguard study.

Vanguard looked at 15 years of returns of all actively managed US domestic share funds, from the start of 1998 to the end of 2012.

As you say, in each year we would expect about half to do better than the index - although it would be somewhat less after relatively high active fees and perhaps bad attempts at market timing, as discussed last week. But the same funds didn't keep doing well. Over the 15 years, only 18 per cent outperformed their index.

Let's look more closely at that 18 per cent. You write of outperforming funds "in some cases consistently returning double digit returns over a reasonable number of years." But that's not what Vanguard found.

Almost all (97 per cent to be precise) of the 18 per cent performed worse than their index in at least five of the 15 years. And for more than 60 per cent, that happened for seven years or more.

In other words, the majority of the 18 per cent performed badly about half the time or more.

This strongly suggests they are higher-risk funds, doing exactly what we expect of higher-risk funds. Sometimes they do really well, sometimes they do really badly. Many investors couldn't cope with that.

Another finding: two-thirds of the 18 per cent underperformed for at least three years in a row.

If you moved your money into one of those funds and it then performed worse than average for three years or more, would you stick with it?

"We conclude from this analysis that investors pursuing outperformance not only have to identify winning managers, but historically have had to be very patient with those managers to collect on their success," says Vanguard.

"When investors simply see an average annualized 10- or 15-year rate of return, they may not be fully aware of the highs and lows that occurred along the path to that average."

But let's say you're unusual, and willing to live with sometimes quite long poor performance. Or that you were lucky enough to choose a fund in the 3 per cent that weren't so volatile. What might happen in the future to outperforming funds?

US firm Lipper Analytical Services looked at the top 20 performers of US domestic share funds from 1988 to 1998. How did they do in the following decade?

- Out of 2322 funds, the average top 20 fund in the first decade ranked 1745th - three quarters of the way down the list.

- Number 1 performer in the first decade came 1485th; Number 2 came 1977th, and Number 3 came 1991th.

- The best performer by far was one that just squeaked into the top 20 list, at number 20. And it hardly shone in the next decade. It came 208th.

'Nuff said.

But hang on a minute. Are New Zealand share funds the same? I haven't seen research on this - again, if anyone has some, let's see it. But local active managers often say it's different here, and that their funds will keep doing better than average.

Maybe that's true for some. There are not as many analysts following New Zealand shares, so perhaps local managers can find hidden gems. But which fund managers can we be confident will keep outperforming enough to more than offset high fees?

Another thing: local fund managers often compare their funds' performance with inappropriate share market indexes.

For example, if a fund holds mainly smaller shares, it should be compared with an index of smaller shares rather than, say, the NZX50 index of the biggest companies. Smaller shares - and their indexes - tend to be more volatile but bring in higher average long-term returns.

Be critical of how fund managers present their returns.

Question: I'm due to retire in 16 months. Is my KiwiSaver fund still invested after I reach 65?

Answer: Yes, the investment can stay unchanged if you wish.

Provided you've been in KiwiSaver at least five years, here's what happens when you reach NZ Super age:

- Government tax credits stop.

- Employers can stop their contributions, but some nice ones continue.

- You can take out any or all of the money whenever you want to.

Question: I am 66, and joined KiwiSaver when I was 63. I retired at 64.

The year I turned 65 I did not contribute to KiwiSaver. This year I did make a lump payment, and received a tax credit.

Do I receive a tax credit for every year for five years since joining? Or have I missed out for the year I didn't contribute? Every dollar helps.

Answer: You're an example of the five-year exception noted above.

People who join KiwiSaver in their early sixties get five years before the three changes take place, including the end to tax credits.

But sadly you have missed out for the year you turned 65. You have to make your contributions - of at least $1043 to maximize the tax credit - during each KiwiSaver year, from July 1 and June 30.

Make sure you keep doing it until five years from your joining date.

Question: I am a 67-year-old school teacher. I left New Zealand when I was 50 and taught overseas for 15 years, returning at 65. During that period I generally returned each year for a few weeks.

According to the rules I will not qualify for NZ Super until I have lived back in New Zealand for five years.

I visited WINZ with a record of entering and leaving New Zealand during my time away and the person counted up the days and told me they would count towards my five-year qualification period. However, a friend in the same situation has recently been told this time does not count.

Can you clarify this situation, and tell me what problem the rule was trying to fix in the first place?

Answer: For the benefit of others, you can't get NZ Super unless you have lived in this country for at least ten years since you turned 20. And five of those years must be since you turned 50.

I'm afraid it looks as if your friend might have been given the more accurate info.

Generally you can't count brief periods in New Zealand towards the five years, unless you "establish residence here during that brief time," says a spokeswoman for the Ministry of Social Development.

"It will depend on the person's specific circumstances. To meet the residency qualifications the person must be both resident and physically present for the required periods.

"To be resident a person must either:
- make their home in New Zealand - in other words they have been living in New Zealand on a permanent basis or

- when considering a period when the person had only recently arrived in New Zealand, they must have intended to make New Zealand their home for the foreseeable future."

She adds, "However, if your reader was paying PAYE tax in New Zealand for any periods while overseas, he may be able to count those periods towards his New Zealand residence and presence. There is more information on this on our website."

What was the rule trying to fix? The spokeswoman gives us some history.

"Prior to 1 April 1990, the residential criteria for National Superannuation (now NZ Super) was 10 years residence and presence in New Zealand, seven years of which must have been immediately preceding the application for Super.

"This period could be reduced for people who had lived in New Zealand for longer periods (i.e. reduced by one year for every complete ten years of residence in New Zealand after the applicant turned 16).

"The old provision was considered unnecessarily complex and disadvantaged people who may have had substantial New Zealand residence but who had been out of New Zealand for 10 years before reaching retirement."

"The current residence criteria allow for more flexibility," she says. "But it is still expected that applicants will have had a reasonably recent connection with New Zealand prior to the date they apply for NZ Super."

You might find that last bit unreasonable, but I expect many New Zealanders would agree with it.

Retirement Commissioner Diane Maxwell said recently she plans to recommend an increase in the number of years people would have to live in this country before getting NZ Super. On average OECD countries require at least 26 years of residency, she says.

Maxwell hasn't yet decided on details, such as whether the "5 years since 50" rule should be changed.

Adds Jane Luscombe of the Commission for Financial Capability, "We've also been assessing whether the proposal to increase the length of residency should apply to returning New Zealanders. Again, we are still working through the numbers before the recommendations are finalised, but at this stage we anticipate that New Zealanders would be treated the same as everyone else."

* Mary Holm is a freelance journalist, a director of the Financial Markets Authority and Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. Her website is www.maryholm.com. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.

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