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 Martin Hawes new book, Letters to Aston Buy this book direct from the author. NZ $40.00 Also available in bookshops nation wide. Buy other books by Martin Hawes |
Huljich
Herald on Sunday
28 February 2010
KiwiSaver is important to this country – the scheme’s integrity and ultimate success are vital. It is important because it could provide a large investment pool for this country, many people are depending on it for their retirement and, most importantly, if the funds are well managed, it may give much needed trust to the financial services and fund management industries. Many people distrust these industries with some justification (this is one of the reasons that property investment has been so popular) and with over one million people now invested in a KiwiSaver scheme, there is a real opportunity for fund managers to show that they deserve the public’s trust.
I am disappointed, therefore, to read of what has gone on in the Huljich KiwiSaver funds.
Huljich is NZ’s largest KiwiSaver fund - but I wonder how many of its 70,000 members realize it is basically a type of hedge fund, looking for absolute returns regardless of the direction of the markets.
Huljich’s prospectus says it uses an absolute return investment strategy – i.e. it does not measure itself against any commonly accepted benchmark or index. This is clearly spelt out in the prospectus but I do not think that many people would realize that absolute returns funds are completely dependant on the skill of the fund manager.
Hulich Board members (Peter Hulich, Don Brash and John Banks) are all very successful people in their own fields; however as far as I know, none has a background in fund management or investment expertise. I wonder what their governance and investment processes are like – are they using best practice in looking after other people’s money?
Two things are disquieting:
First, Huljich sold privately owned assets into the fund cheaply to try to make up for the losses that the funds had taken. Huljich claims that this transfer was made with all the right intentions (Peter Hulich felt morally responsible) but the effect made the returns on the fund look better than what they actually were – encouragement for people considering which scheme to join to sign up with Hulich.
The second thing is even more worrisome: according to media reports, Huljich has a huge 13% of its KiwiSaver funds invested in just one asset. It may not be so bad if this asset was a big, well established and stable company; however, the asset that makes up such a large part of the fund is shares in something called New Image – a small company whose shares are not easily traded.
The Huljich Investment Statement says that when markets are volatile, they will weather such storms by going to cash. They will really struggle to go to cash with their New Image holding.
There are only about 230m shares on issue in New Image and most of these are locked up in a few hands. Huljich would not find it easy to sell its holdings if that became necessary. This New Image investment may or may not be successful for Hulich and its investors - the way that these particular dice fall will make a big different to the profit or loss the funds make.
Investing other peoples’ money is not the same as investing your own: I may take an oversized punt on something like New Image (in fact, I probably wouldn’t) but to do it with other people’s money which is in trust is reckless to the point of negligence. In managing the public’s money as is the case in a KiwiSaver fund, a prudent person would have no more than 5% (maybe less) of the fund in a single asset. By any standards, 13% of a very small company is way out of line.
Investment markets only work properly when the rules are clear and applied consistently. KiwiSaver funds have no government guarantees and with so much of the public’s money likely to be invested in them, they should be tightly regulated and those regulations strictly enforced. If that means closing down a fund or two, let’s do just that. There will always be investment failures and losses – but KiwiSaver is far too important to further these expected losses by allowing governance and regulatory failures.
Martin Hawes
The demise of the easy option
(Herald on
There is now little doubt that there will be changes to the taxation rules for residential property investment and that this country is not going to see another residential property boom for a good while. With rental yields so low and little prospect of capital gain, many smart investors have already reduced their exposure to housing and have started looking for better investments.
I am sure that the housing market will wobble around a bit in the coming years – there will be some ups and downs but mostly it will probably just go sideways. Speculators and traders may make a bit of money but serious investors know that the current shortage of listings is a good time to leave the markets (if they haven’t already). There simply are not good enough returns in this asset class and there are far better things to invest in.
It is time for investors to start to learn about some of the other investments. In the past our default setting has been to invest in “easy” investments like finance companies and residential property. These investments have been easy in the sense that they are not hard to understand: finance companies were simply small banks and residential property investment is just like our own homes. It took a crash to teach us that small, unregulated banks which only pay a little more interest than a proper bank was not a good idea. And many people are about to learn that the low yields with no capital growth make housing a pale imitation of real property investment which is commercial property.
So, what investment areas should Kiwis be learning to invest in? My answer to that is that we should join the rest of the world and invest in commercial property and in businesses via the share market.
It is unknown whether commercial property will be brought into the same tax rules as residential property investment – I would guess that it will be treated differently but I don’t really know. In any event, taxed more heavily or not, commercial property works quite differently from residential property and makes a much better and more profitable investment: it has much higher yields and it is generally bought and sold on the basis of those yields rather than whim and fashion as is often the case with housing. Management of commercial property is easier and tenants on the whole better to deal with.
The trouble with commercial property is that they often require so much money – many of us cannot but into good quality commercial property by ourselves. The solution to this problem is to buy into Property Trusts, many of which are excellent investments and, thanks to the PIE regime, tax efficient.
It is harder to convince many Kiwis of the virtues of share investment – the 1987 Crash is still a painful memory. However, the conditions and lack of regulation that led to the crash are no longer with us.
It is true that shares will always be a volatile investment. However, for long term investment, even with the ups and downs, it is hard to beat buying into a business. And that is how we have to see share investing: we are buying a business (albeit only a share in a business). Sure the price of the shares may jump around, but the value of good businesses generally stays fairly constant.
I think that there may well be considerable volatility of share markets this year: smart investors will view that as a good opportunity to buy into some good businesses.
Kiwis need to take a fresh look at their investment habits and re-learn some of them. The easy, default option of buying residential property does not look like a good deal anymore.
Resolutions and Goals
(Herald on
For years I have known that New Years resolutions are a waste of time – even as a small child I knew that such resolutions were soon abandoned and forgotten. And yet I have long set goals for myself and known well that they are very powerful for achieving things that are important.
The difference between resolutions and goals is that one is statement of what you are going to do (the resolution) while the other is your desired outcome (the goal). Thus a statement like “I will spend less and live to a budget” is quite negative and will not be as successful as “I will have $5,000 in the bank by the need of the year”. The goal is worded positively – a statement of where you want to be and what you want to have is a far greater motivator. Sure, you are still going to have to live to a budget to have the $5,000 but keeping that attractive outcome firmly in your sights is much more likely to be effective.
We all need help to do the hard stuff. Whether it is the diet, to get fit or have better finances, the best help that you can have is a goal that is framed in a positive way. A bald, negative statement of what you will not do does not give the motivation of a clear and desire able outcome.
When I am helping clients with their finances there are many things to consider – investments, insurances, debt reduction etc. However, I think that the most important and valuable thing that I do is to establish their long term goals to give them a focus for what it is that they are trying to achieve.
This may be something like: “we will have a net worth of $750,000 by 2015” or “we will have a mortgage free house by the time we are 45”.
Goals have to be specific and measurable – they are numeric and so a hard and fast reflection of whatever it is that you want. They also have to be achievable: there is no point in having a goal that is arbitrarily plucked out of the air. Goals need to be relevant to the things you want in life and should have a time limit for when they will be achieved.
However, most importantly, goals should be in writing. A goal that is committed to paper cannot be fudged – you cannot fib to yourself about whether or not you achieved a written goal. You know that you will have either achieved it or not – the written goal is unambiguous and there is no middle ground - and for most of us this will mean that we will do whatever is necessary is necessary to realise our ambition.
Resolutions (what you will do or not do) simply don't work. Decide on the result that you want whether it is to be healthier, slimmer, have a happy retirement or have more money. Put it in a form that you will know whether or not you have achieved it, write it down and keep it somewhere so that you can see it regularly.
Predictions for 2010
(Herald on
I hate those reviews and previews that are so prevalent in the media at this time of year. So it is with some apprehension that I sit down to write just such a piece. For the most part I will not review the last year – I can fairly safely assume that you were there so hopefully will remember what happened.
Let’s think then about the coming year and (most dangerously) make some predictions for what might happen. I think that we should think about three things:
First, there will be no boom in house prices – in fact, if anything the risk is on the downside for house prices and they could finish 2010 at lower levels than they started the year.
Government will simply not allow house prices to rip away again. Already there is talk of taxing the housing sector more heavily and any sustained increase in house prices is bound to be met with strong action on interest rates and with new taxes. I expect new taxes to be targeted mostly at rental properties however it is possible that owner-occupied housing may also be included. Moreover, housing is over-valued on most fundamentals and astute investors have been sitting on the sidelines refusing to buy knowing that there are better investments available. Increased interest rates and new taxes on housing will mean that sophisticated investors remain as spectators for longer yet.
My second prediction is that share markets around the world will take a big hit. This could be sooner rather than later and may be precipitated by another wider economic slump. The global economy is quite fragile and there is still a great deal of toxic debt that had not yet been resolved.
Share valuations seem to me to have got ahead of the insipid economic recovery that we have had and if the recovery does not gather pace, shares will drop sharply. This is especially so in where shares seem particularly overvalued and vulnerable. I have always liked emerging markets as investments but the high returns that they offer come with a lot of volatility.
I think that smart investors will keep their powder dry at the moment but use the slump when it comes as a wonderful opportunity to buy good companies at bargain prices.
Finally, in expect some new bond issues. It is still not easy for businesses to borrow from banks and our bigger corporates will solve this problem by going direct to the public and issuing bonds. (With the finance company sector effectively gone, smaller businesses will continue to go hungry).
There is an expectation of higher interest rates next year, and so bond issuers will need to offer decent rates to attract investors: I expect rates above 8% for good corporate bond issues.
The last year has not been good but do not expect to go back to “normality” – not, at least, if your idea of “normality is the consumer binge that we had in the lead up to the recession. The next year will be hard scrabble for many although savvy investors who are patient should do very well.
Martin Hawes
Adviser Commissions
(Herald on Sunday 6 December 2009)
I do not think that it will be very long before commissions paid for the sale of investments will be banned in this country. In the last few months there has been a sea change and the tide is now running very strongly away from those who sell investments on a commission basis. Financial advisers would be well advised to take note and start to think about the business models that they have.
In July of last year I wrote a column in which I said that financial advisers would never win the respect of the public or be regarded as a true profession until they changed the way that they were paid. At the time, there were not very many people in financial advice industry who agreed with me.
Now there seem to be several moves afoot which will bring change: in , a Parliamentary enquiry recommended consultation to cease payments from investment ‘product manufacturers’ to financial advisers. Here in it is clear that the Securities Commission and the financial advisers’ Code Committee are looking closely at commissions and with a strong desire to align NZ and ’s regulations on Financial Advisers, it is most likely that we will follow fairly closely in this area.
The Australian enquiry also recommended that advisers should operate under an explicit fiduciary duty – that they should put the interests of their clients before their own. Two weeks ago, the Code Committee released a discussion paper on adviser ethics which had as its first objective that financial advisers should place their clients’ interests first and that they should be independent and objective.
I do not think that putting your clients’ interests first and being independent and objective are compatible with selling a fund manager’s products on commission. Individual advisers are often ethical but the commission method of payment will always leave a suspicion of surrender to a conflict of interest.
This is really important for investors many of whom have been badly hit in the last few years – money has been lost and lives wrecked by the collapse of some very poor finance companies. As much as 25% of finance company came through financial advisers – that represents a lot of money. If we had had better regulations in place and financial advisers had not been paid generous commissions by the finance companies, I do not think that they would have been so keen to recommend Bridgecorp and the likes to their clients.
I do not think that the difficulties over the last few years were caused by financial advisers’ incompetence so much as a desperate scramble for commissions. The company that paid the highest rate of commission won (until it went broke).
The Code Committee has done some excellent work on financial adviser ethics and we may soon have an industry that the public will trust and make use of to a greater extent than they do now. If this positive trend continues, in a few years time financial advice will come not from an industry that is the sales channel of fund managers but from a group of professionals who are respected and trusted by their clients. That has to be good for everyone – clients and advisers.
The "I" word (Herald on Sunday 22 November 2009)
Over the last year or so there has been a global debate regarding inflation. On the one hand, some people say that high inflation is inevitable – high government spending means printing more money which will see increased prices. On the other hand there are those who would say that deflation is the bigger risk and Central Banks will manage money supply perfectly well as the economy recovers. I do not really know which side is right – my crystal ball is cloudy on this one. However, what I can say is that there is a significant risk that inflation will get away again and that you would be mad to ignore the possibility. Inflation robs those with savings (especially those who have not invested well) and benefits those who have borrowed to buy things like property and businesses. This transfer of wealth from savers to borrowers can devastate the finances of the unwary. Let me give you an example: in 1974 I borrowed $6,000 to buy my first house. This seems a very small amount today but using the Reserve Bank’s inflation calculator, you can see that this $6,000 in 1973 was equivalent to around $65,000 today. A good way to think of this is that I had borrowed $65,000 and that without paying anything off the loan it has been reduced over 35 years to $6,000. This inflation induced reduction in my real indebtedness was greatly to my benefit but if the lender had simply taken the interest payments that I had made, his or her wealth would have greatly decreased in real terms. Inflation really is a scourge for those who can’t manage it (deflation is not much fun either but that is a whole other story). Whatever your circumstances, you need to be alert to the risk of inflation and be ready to act. Those investing for income – mainly retired people – must give up the comfort of investing all of their money in bank deposits and bonds. These things do not give income growth and are ravaged by high inflation. You will have no choice but to get a good proportion of your money into property trusts and shares both of which tend to give growth which at least matches inflation. Younger people with debts need to be ready to fix their mortgages. There are many people enjoying low floating mortgages at the moment but you must recognize that you are carrying a big risk by doing so. Conventional financial wisdom says that you should match a long term asset (your house) with long term borrowings (a fixed rate mortgage) and trying to profit from lower floating rates may backfire. It is quite likely that New Zealand will continue to have a positive yield curve (where short term money is cheaper than long term) - if rates do rise, fixed rates will rise with floating ones. I hope that the menace that is high inflation will not return - but that will not stop me from being ready for it.