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 19 November 2016
Q&As: NZ tops the world - so it might be better to wait to buy a house
- KiwiSaver tax credit still $521
- Share fund not so great - especially if you check what it's measured against
Question: I am 30 and would like to buy my first home in the next few years. I would like some advice on where to save the deposit. I have no debts (student loan paid off), work full-time and currently rent, but would love my own place.
I save $600 towards my house deposit each fortnight, with a goal of $30,000 saved in two years. I also have KiwiSaver, with a balance around $45,000 which I plan to use for the deposit (less $1000).
I would ideally like to buy a home in Hamilton around $400,000 to $450,000, but of course prices keep rising!
Where is the best place is to save my fortnightly deposit? I'm currently using a savings bank account, but have wondered about shares or term deposits to get a better interest rate?
Answer: Well done on setting a goal and making regular savings. That's how dreams like yours come true.
Given that you hope to buy your home in the next few years, I would stay clear of shares or a share fund. Over a short period there's too big a chance your balance could go down.
But it's quite likely you can earn higher interest with bank term deposits than a savings account. And you don't need to stick with your own bank. Check out the interest rates in the table to the right of this column. For more info go to www.interest.co.nz.
As for rising house prices, who knows? Despite prices being higher elsewhere, our graph shows the all-important data - prices relative to incomes. And New Zealand is way out of line.
Since 2010, New Zealand's ratio of house prices to incomes has soared 33 per cent. Other countries anywhere near that growth rate are in Europe. The countries we usually compare ourselves with - Australia, the UK, the US and Canada - have all seen considerably slower increases in that ratio.
Regardless of supply and demand, immigration, the pace of construction and so on, house prices can't keep rising if people can't afford to buy.
That's why I'm making an exception to one of my golden rules of investing: Don't try to time markets.
If you were buying shares or bonds, you could dripfeed into the market, but unfortunately with a house purchase you must buy the whole thing on one day. Because of that, and this country's top spot in the graph, I wouldn't buy a house right now - or certainly not in Auckland or elsewhere where prices are rising fast.
In your case, it's good that you're not ready to buy yet. Prices might well drop in the next couple of years. If they don't, if I were you I would stay on the sidelines until they do.
This graph comes from the International Monetary Fund's website. On the same page - at www.tinyurl.com/HouseGraphs - there's another graph, of the ratio of house prices to rent. It shows New Zealand has the third highest growth since 2010, after Turkey and Sweden. In other words, house prices are rising much faster than rent.
That suggests that paying rent for a while - and continuing to save - isn't a stupid thing to do.
Footnote: I'm not saying house prices will fall for certain. I'm just saying what I would do.
Question: I have a question about the reader's KiwiSaver tax credit question last week. She wondered if her son should keep contributing so he would not "miss out on the $1043 'tax credit'."
I thought the maximum tax credit you could get now was only $521.43, or has the government changed it again?
Answer: No change. You're quite right, the maximum tax credit is $521. To get it, you have to contribute at least $1043. I read right past the error, which I should have caught.
Question: Carmel Fisher in her article on Friday 28 October said "I know our oldest active fund (it is nearly 20 years old) has beaten the index, after fees by around 1-2 per cent every year".
This is wrong. I rang Fisher Funds and was told that the fund in question is called the NZ Growth Fund. It was established in 1998 so it is almost 20 years old and it is their oldest fund.
If you download the fact sheet on Fisher Funds website it shows that it has underperformed the index for 1 year, 2 years and 3 years ending September 30 2016.
Answer: Carmel Fisher replies: "Unfortunately our checking/editing process missed this one. The reader is correct that the wording in my column was not strictly correct, because while the Fisher Funds NZ Growth Fund has beaten the index resoundingly over its lifetime, it has not been ahead of the index each and every year.
"The Fund's cumulative returns are well ahead of the index returns over long periods, averaging 1-2 per cent per annum, but in 5 of the last 17 years, the Fund has lagged the index. Notwithstanding this, the Fund has demonstrated an ability to beat the index over time. A passive fund can never beat the index," says Fisher.
She attached a spreadsheet that shows the fund has outperformed the S&P/NZX50 Gross Index and its predecessor, the NZSE40 Index, 72 per cent of the time.
"The cumulative performance of the NZ Growth Fund in the ten years from December 2005 to December 2015 is 100.7 per cent versus 87.6 per cent for the NZX50 Index, supporting my belief in the value of active management (acknowledging that you are an ardent non-believer!)," she says.
I looked at the spreadsheet, and sent Fisher one more question: "It seems surprising that you wrote that the fund had beaten the index after fees 'by around 1-2 per cent every year', when as recently as 2015 the fund underperformed by a long way - 9.2 per cent compared with 17.3 per cent for the index. How could that happen? Did you forget that or something?"
Her reply: "Oh come on Mary, are you seriously going to focus on one year or two years when my column was clearly talking about our oldest fund with an eighteen-year history of returns?"
The next day, Fisher wrote again: "I've just had a chance to look again at your question and realise that you weren't just focusing on the underperformance in a few years in between a long period of outperformance, but rather, you are questioning the fact that the underperformance in one year was more than 1-2 per cent.
"If you look back at my first response you'll see that I refer to the cumulative outperformance over time equating to 1-2 per cent.... You're right, each year the performance difference between the fund and the index can be a lot larger than 1-2 per cent.
"It was a big difference in 2015 on the downside, just as there were many years when the difference was very large on the upside. That is a very typical pattern for active funds, and doesn't alter the point of my column, which is that our fund has outperformed the index over the long term."
The Growth Fund has indeed had some great years. In 2000 it grew 15.9 per cent while the NZX50 dropped 13.9 per cent. In 2006 it grew 43.4 per cent compared with 14.4 per cent. And in 2011 it grew 5.7 per cent while the NZX50 dropped 1.1 per cent.
But it's interesting to note the pattern in the five underperforming years since 1998. They are 2003, 2008, 2010, 2014 and 2015. As the fund has grown, the below-par years have increased - perhaps because it's harder to do well when you're bigger.
And by the way, advocates of active investing often say they can bail out of shares before a downturn, whereas passive - or index - funds have to stay put. In the ghastly share market year of 2008 the NZX50 lost 32.5 per cent. Fisher Funds' NZ Growth Fund lost 46.5 per cent.
Okay, but the fund has beaten the index over the long term. But - and here's the key question - which index?
Comparing a fund's performance with an index is meaningful only if the index covers the same segment of the market as the fund invests in.
Is it appropriate to compare the Growth Fund with the NZX50, which measures the growth of our biggest 50 shares, and is weighted by "float-adjusted market capitalization." Basically that means that the bigger the company, the more weight it has in the index.
This weighting means that just four shares make up almost a third of the index.
Fisher Funds' website doesn't say how much of each share the Growth Fund holds, but it would be rare for an active fund to have such a concentration in so few companies.
It's arguable that a fairer comparison would be with the NZX50 Portfolio Index. It includes the same biggest 50 shares, but with no company making up more than 5 per cent of the index. The cap makes the index "more aligned with what a retail investor may hold," says Standard & Poors, which runs the indexes.
The NZX50 Portfolio index is the one that Smartshares' NZ Top 50 index fund invests in. And its weightings are more like what most active share funds would hold.
From December 2005 to December 2015 that index rose 113.1 per cent, beating the Fisher Growth Fund's 100.7 per cent.
There's another issue here, too, and that's the size of the companies in the Growth Fund and the index we're comparing it with.
Sixteen out of the 19 shares in the Growth Fund are in the biggest 50. But the other three are smaller companies. And smaller companies tend to be more volatile but bring in higher average returns. Perhaps that's why, as Fisher noted above, the Growth Fund tends to be more volatile than then NZX50.
It could be argued, then, that it would be fairer to compare the fund with an index that includes smaller companies.
One possibility is the MidCap index, which excludes basically the biggest ten companies on the stock exchange and includes some smaller ones.
Twelve out of 19 of the shares in the Growth Fund are in that index. Four shares are not because they are too big, and three are not presumably because they are too small. So on balance, the MidCap index might be a better fit with the Growth Fund, size-wise.
And between December 2005 and December 2015 the MidCap grew 159 per cent. Suddenly the fund's 100.7 per cent doesn't look so glossy.
I should add here that academics and government officials have criticized other NZ active fund managers for not using the most appropriate indexes to compare with their funds' performance.
Under new regulations, fund managers will have to get this right.
"The purpose of the market performance index requirement in the regulations is to help compare the performance and volatility of the fund with a particular market," says a Financial Markets Authority spokesman.
"The appropriate use of indices is something we will keep an eye on after the new law is fully effective from 1 December this year."
* 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 firstname.lastname@example.org 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.