Will you spring into retirement?
To me, spring is the best time of the year. No question. Spring represents life, a new beginning and a feeling of hope and optimism. There is a scientific reason for this. Increased exposure to sunshine (vitamin D) improves our liver functions and reduces the risk of many illnesses and diseases. We are healthier, which makes us all feel better emotionally and more optimistic.
This in turn makes us all more likely to make more decisions, undertake more economic activity and basically live life more to the full. It’s called UV economics. I have always believed in this phenomenon, because of what I have witnessed in New Zealander’s attitudes during spring and early summer. Our focus quickly becomes the beach, BBQ’s, family, holidays and doing positive things. No business (or politician for that matter) should ever get in the way of a Kiwi and this mindset!
With the onset of spring, there’s no better time for New Zealanders to make some bold decisions about their future.
You see we think we are doing a better job than before of preparing for the future, after all we have $42 billion in KiwiSaver now. The reality is New Zealanders remain grossly underprepared financially for retirement. On a like for like basis, Kiwis have around 20% of the pension type assets of other western nations. This is exacerbated by the very low inflation, low interest rate environment that we now live in. Interest rates are relevant because it means it takes more savings to generate a satisfactory income in retirement.
The size of the problem we face is evident in the population statistics which show New Zealand is now a country of 4.7 million people (that last million has arrived quickly!) and 47% of these are over 40 years of age. Collectively we are underprepared, and while there is individual responsibility, there has to be a collective response. Our children and grandchildren shouldn’t have to pay excessive taxes in the future to keep previous generations in a basic lifestyle in retirement.
So how can you turn the wave of spring optimism into retirement renewal? For those in KiwiSaver, a simple step that can be done right now is to increase contributions from the minimum (3%) up to 4% or 8%. It’s a small change that can have a big impact and it is amazing how quickly spending patterns can be quickly adjusted to the new level required. Many savers have made this adjustment, but we need a lot more to take this step.
For those who have a portfolio of investments or are already on the maximum KiwiSaver contribution, this is the right time to ask if you have invested wisely. New Zealanders have 55% of their pension assets in relatively low yielding cash and bond funds, whereas Australians only have 30%, Canadians 35%, the Swiss 42%, British 37% and US citizens only 24%. New Zealand investors’ natural conservatism have cost them billions of dollars of lost returns in recent years. Have you reviewed your investment strategy lately?
For those relying on trading down the size of their family home as a way of funding retirement this may not be as easy as you think. While residential property has been a stellar performer in recent years that is a huge bet, particularly when you consider the largest population group (baby boomers) are all going to be looking to sell down at the same time, to a new generation that largely cannot afford to buy homes. Making that change earlier and diversifying investments beyond just the family home makes a lot of sense.
The Government, of whatever colour, is unlikely to change any of the above situations. It is time for us all to be bold and use the optimism of spring to take control of our own retirement savings and our retirement lifestyle. Soak up that warming sun, absorb the vitamin D, and then make the decision. The team here is ready and waiting to help you make these decisions. We are with you all the way.
Chief Executive | Fisher Funds
Managing your KiwiSaver account
There has been a lot of talk recently about Member Tax Credits or in plain language, the annual government contribution of up to $521.43 into your KiwiSaver account. The real story is the surprising number of eligible New Zealanders who are not collecting the free money that they are entitled to. The Commission for Financial Capability estimates that over one million Kiwi’s are missing out on up to $300 million of government KiwiSaver subsidies.
Don’t let MTC stand for Missed Tax Credit in your life if you can afford not to.
So why might you miss out? The answer is relatively simple: it all comes down to what you are contributing.
What can you get and who can get it?
If you’re between the ages of 18 and 65, for every $1 you contribute to your KiwiSaver account, the government will contribute 50c up to $521.43. In other words, $20 saved, gets you $10 back. It doesn’t matter whether you are working or not.
If you can’t afford to save $20 per week, you’ll still be rewarded for what you can save. For example, saving $500 will get you $250 back.
What employees need to know
If you’re employed and earning more than $35,000 and putting in a minimum of 3% of your salary ($1,050) the good news is you should be receiving the full $521.43 government subsidy. Even better is the fact that you don’t need to do anything to claim this money, it will automatically be paid into your KiwiSaver account.
If you’re employed and earning less than $35,000 you can still collect the full $521.43 subsidy by topping up your account to ensure you have put in the equivalent of $20 per week or $1042.86. Remember the $1042.86 needs to be money you have paid yourself and doesn’t include the contributions from your employer.
What self-employed or not employed members need to know
If you’re self-employed or not employed you’ll be pleased to know that you are eligible for this government subsidy too. The same rules apply — for every $1 you put in the government will give you 50 cents up to a maximum of $521.43. So if you contribute $1042.86 or more you will get the full $521.43. There’s no better guaranteed return on your money. If you can afford to contribute why wouldn’t you?
I’m on a contributions holiday so it doesn’t matter
If you’re on a contributions holiday it might be time to revisit your plan as by not contributing you not only miss out on government contributions but employer contributions too. If you decide you’re not ready to commit to contributing regularly you can make voluntary payments into your KiwiSaver account — yes, really! This means that if you contribute $20 per week or $1042.86 within the KiwiSaver year then you will receive the full $521.43.
It’s only $20, who cares?
True but when you look at how money works over time, small amounts grow into serious money. In this case, $35,901. The Commission for Financial Capability estimates that’s what the $521 a year contribution will be worth for someone in KiwiSaver who starts now at age 18. By the time they’re 65, and adjusting for fees, taxes and inflation, getting that annual contribution will mean they have $35,901 more.
Don’t miss out any longer!
The easiest and most flexible way to contribute is to set up a weekly direct debit of $20 — that way it takes care of itself every year. Click the link below to do it online now.
Your KiwiSaver portfolios: Highlights and lowlights
A snapshot of the key factors driving the performance of markets and your portfolios last month.
The NZX50 delivered yet another strong month in August, making it eight months in a row of positive performance, adding 1.6% and taking its gain to 13.6% for the year. The New Zealand portfolio gained 0.2%, trailing the index. Fisher & Paykel Healthcare was the top contributor, up 7.3% for the month, during which it held its AGM and effectively lifted its underlying operational earnings guidance. Trade Me was the biggest drag on performance for the month, (down 15.0%), after the company confirmed it will be re-entering a period of reinvestment back into the business and therefore margins will come under slight pressure.
Despite a deluge of news over the reporting season, the return on the ASX 200 Index for August was a modest 0.7% in Australian dollars. Our Australian portfolio returned 1.9% in Australian dollars. With the New Zealand dollar softening, the New Zealand dollar return was 3.4%. The portfolio had an acceptable reporting season with 64% of our companies meeting or beating consensus earnings expectations and 36% falling shy. Median earnings growth for the portfolio was 6.9%. Among our larger positions, the market responded very favourably to the results of ARB (encouraging export growth) and Carsales.com (sound core Australian performance and strong growth from key offshore investments). Seek was punished for disappointing guidance for the year ahead due to reinvestment in the business.
Our International share portfolio outperformed its benchmark returning 5.5% in August. This was mainly driven by stock selection within Financial, Information Technology and Healthcare sectors; a fall in the New Zealand Dollar against major currencies also helped returns. Technology giant Apple led the way with its share price rising 11% to a record high after announcing strong revenue and profit margin growth and the upcoming launch of the new iPhone. Microsoft, Rio Tinto and Alibaba were the other major contributors, up 3%, 9% and 11% respectively. On the flip side Nike fell 10% due to competitive pressures from its peer Adidas. Walt Disney and Priceline Group were down 8% and 9% respectively.
A number of global government bond markets closed in on their lowest yields for 2017 during the month of August. Having maintained a stance whereby our funds are set to produce outsized returns should bond yields fall, our New Zealand Fixed Interest Fund enjoyed another month of outperformance. Despite the strong performance of late we still believe the safety of government bonds will continue to entice more investors in this market, due to the likely deterioration of both economic and geopolitical outlooks.
Our international bond managers remain underweight interest rate exposure (i.e. Duration) across most major developed fixed income markets. This month bond yields are falling resulting in an under performance of our Fund relative to it's benchmark. Pleasingly this was offset by the high proportion of U.S Treasury bonds we currently hold, given they were some of the top performers for the month.
Your KiwiSaver portfolios
Remember the days of the schoolyard. Exam results. Sweaty palms, a beating heart, the thrill of success, the worry of failure. For our Portfolio Managers, the “reporting season” has echoes of exam results. Reporting season is that time of the year when companies announce profit results for the past six months or, in the case of the United States, the past quarter.
When we invest in a company we develop a clear road map of where we think that company is heading. We look at this primarily from a strategic perspective. What is a company doing to beat its competition, how will it sell more goods and services and can it improve profit margins? The litmus test of strategy is profitability. A good strategy means over time a company earns higher profits and higher profits mean a higher share price and happy investors.
Reporting season is one of those litmus tests. It helps us assess if a company remains on the road to investment success or if things are beginning to stray. This is often a time that we make active changes to our portfolios.
While the media commentary on company results often looks at the headline numbers the real insights may be buried much deeper. On the surface Freightways, the New Zealand based courier and document storage company, downgraded earnings expectations for next year. In a knee jerk reaction the market sent Freightways shares down. For us this was an opportunity. Freightways profitability next year is impacted by investments the company is making in more airfreight and warehouse capacity. These will fuel future growth and result in a more valuable business.
Australian producer of four wheel drive vehicle accessories and components, ARB, is a great example of a company that has gone through an investment phase opening up new warehousing capacity in export markets, new stores in Australia and adding to sales capacity. This investment was at the heart of why we recently invested in the company and is now beginning to pay off. Export sales, in particular, were up a pleasing 14.3% over the year. The share market loves growth and ARB was rewarded with a nice share price jump.
Sometimes reporting season can be a chance to see if decisions we have already made were right. In May, we exited our investment in US based telephone headset company Plantronics. The promise of investing in Plantronics was based on companies adopting “Unified Communications”; in short, moving away from traditional phones to using internet based telephony like Skype. While this is undoubtedly where the world is heading, we become cautious that the transition was happening very slowly. This fear was confirmed by a number of industry experts we spoke to in the United States. We exited Plantronics. The company just posted poor results and the stock fell 20%. Sometimes a dollar saved is just as important as a dollar earned.
Overall it was a good reporting season, with more passes than fails. That said, where managing a portfolio is different than the old schoolyard is that we get to retake the exam over and over again. Each results season is a chance to actively manage our portfolio and to drive for even better results next time. Great results are the best way to slow that beating heart.
A recent survey conducted by the Financial Markets Authority suggests New Zealanders are still very much in the dark about one of the world’s largest financial markets — the bond market. This is despite a majority of assets held in KiwiSaver default schemes being made up of fixed interest assets such as these. So let’s shed some light on the situation.
When trying to grasp a new concept I often find drawing comparisons with something I’m more familiar with helps build my understanding. I’m going to adopt the same strategy here. I hope it works as well for you as it does me.
I’ve chosen the humble term deposit as the closest and most familiar comparable. It may surprise you just how similar the two really are.
In just the same way that you lend your money to the bank when you take out a term deposit, a bond is also a type of loan. But instead of lending your money to just one bank, the bond market allows you to lend to any number of borrowers anywhere in the world. As you might imagine, the list of would-be-borrowers at any one time is huge. They could be companies (that might want to expand their footprint), they could be governments and councils (who need to fund necessary services that taxes can’t currently cover), or they could be specific entities (trying to fund a project such as building a new road, a power plant, or pipeline). The list of potential borrowers is so long I could never cover them all here. But I think you get the picture.
The similarities to a term deposit don’t end there. In return for lending out your money, the borrower pays regular interest amounts and, all going to plan, your money is returned at the end of the term. In much the same way as the bank is obliged to meet this promise to you, borrowers through the bond market also have a similar obligation. They are largely non-negotiable. This makes them far more reliable than say a dividend paid on a share investment which could be cancelled at any point without notice.
Another similarity is that term deposits and bonds both typically have a pre-determined maturity date, or term, assigned to them. Knowing when and how much you are expected to be paid makes the return on these investments far more certain, lowering the associated risk. It is the combination of these characteristics that affords the highest rated bonds their enviable title of safe-haven assets.
Like most investments, not all bonds are created equal though. Our job is to assess the credentials of all these bonds and identify those that will perform best when combined into a portfolio — allowing you to spread your investments out and not put all your eggs into one basket (the bank). The sheer size of the global bond market gives us lots of choice, and the flexibility to mix and match different terms and interest rates of the many different borrowers relative to the risks they present.
Interest rates are at historic lows. So getting the right mix of bonds is important as movements in interest rates can and do influence the value (or price) of bonds — a key difference between them and term deposits as bonds can be sold before maturity and therefore have a tradable price.
So next time you read about bonds, hopefully you will rest easy rather than being shaken or stirred.
Investing money can be nerve-wracking. Not only do you have to make sure that you’ve chosen the right investment, but you don’t want to be caught out investing at the top of the market. This is where investing on a regular basis can be an approach worth considering.
Market volatility promotes some unusual behaviour in share market investors, especially when share markets perform poorly. Some see it as a great opportunity to buy shares and try and time their entry into the market to maximise returns. Other investors get nervous about losing money and sell their investments, turning a paper loss into a real loss. Understandably this can deter some people from investing. However, making regular payments is an approach that can take away some of the worry and can also make the inevitable ups and downs work for you!
For most of us, we can’t possibly know when the “right” time to invest is. A good way to reduce the risk of getting the timing wrong (especially in volatile times) and to take the emotion out of investing is to invest smaller amounts on a regular basis. A lot of investors like to employ a strategy known as Dollar Cost Averaging which is a fancy name for drip-feeding your investment over time. Dollar Cost Averaging involves investing equal amounts of money at regular intervals. If the share market does fall, you will have only invested some of your savings. In addition, your future investments will take advantage of the cheaper share prices now on offer. Investing regularly can help smooth your return.
A good example of this was back in 2007 when KiwiSaver launched. It just so happened to coincide with the global financial crisis which saw the unit price of our Growth Fund fall sharply in a relatively short period of time. While it didn’t feel pleasant at the time, investors who were putting money into the Fund on a regular basis benefited from this significantly when markets recovered. They were rewarded for having bought more units when the unit price was depressed.
At Fisher Funds we make investing regularly accessible and flexible. We can accept weekly, fortnightly or monthly investments into our Managed Funds from just $100. On top of this, you have access to these funds whenever you need providing flexibility that you don’t get from the likes of term deposits. Your money should quietly build over time and hopefully provide a handy sum when you ultimately need it. This is a great way to create a nest-egg for yourself or even your children.
So if you like the idea of an investment approach that can take the worry and emotion out of the decision, that can smooth your investment journey over time, and doesn’t require a big initial lump sum, then setting up a regular investment could be a great option for you to consider.