The investment services sector has long lamented the lack of sophistication and financial literacy of the New Zealand investor. Investors, for their part, have suffered at the hands of financial charlatans and careless industry regulation and policing. The global financial crisis may have sparked some positive changes.
It seems that many New Zealand managers would be wealthier and more secure if they stuck to their day jobs – managing the nation’s workforce.
The generalisation inevitably has its limitations, but the negative commentary on managers’ personal investment prowess is surprisingly prevalent and consistently similar.
“The problem with managers who handle their own investing is that they often think they know what they are doing simply because they are senior managers and, as consequence, believe they should be good at it. They are frequently not,” said one investment advisor whose summary reflected the experiences of others.
Managers seem too “proud” to pass control of their investment decisions over to others. They also want to be “hands on” when few of them have the time or expertise to make good decisions.
“Delegation” may be well-worn word in the general management lexicon but, when it comes to personal investment advice and portfolio management, managers appear unable to heed their own best advice. “They should free-up their time for managing things they are good at,” came the oft-repeated suggestion.
That particular strain of professional disability aside, the profile of New Zealand’s personal investment landscape is changing. And attitudes toward investing appear to be changing along with it. The greed-driven finance company sector has, in large measure, been lanced. The property market, the perennial distorter of the nation’s investment economy, is re-positioning and investment risk expectations across the board are seemingly more aligned with reality.
As Asia Pacific Risk Management director Roger Kerr puts it: “Investors are significantly more risk averse and their [investment return] expectations are changing.”
Systematic theft
The combination of shattered investor confidence and systematic theft on both local and global scale has, suggests Kerr, now created “perhaps too many overly cautious” investors.
Given this reality, Government bonds are the first port of call for the shell shocked. And while the term ‘safe as houses’ might seem tad insensitive at present, these bonds are about as secure as investment options get, paying around five percent for 10 years and quite bit less for five.
Bank deposits are the next most secure option. But at four percent or less, they may not seem very attractive – particularly to older investors. Any expectation that investors will get five to six percent over the next 12 to 24 months has disappeared, says Kerr.
However, Forsyth Barr’s director of private client services, John Owen, thinks investors are now better rewarded for their risk. “Many fixed interest returns were actually very low, even though investors didn’t realise it at the time,” he says.
“The pricing of investment assets is now more user-friendly. Debt products offer better yields and margins than existed two or three years ago. Investors now understand risk better and consequently they are better rewarded. Interest rates may be lower, but the margin is greater.
“Fixed interest securities’ margins before the crisis were often less than one percent. Margins now range from one to three percent, depending on the credit rating. It’s the margin that matters,” says Owen emphatically. “People forgot to look at the fine print before.”
This said, the banks aren’t lending much and the economy won’t pick up much before 2012. The major banks’ deposit offerings aren’t, therefore, likely to exceed four percent this year. The four Australian-owned trading banks’ investment products and services still seem to be suffering general market waryness – lingering after-effect, perhaps, of the lashing they delivered many small businesses following the GFC.
There is one exception. relatively new player into the local wealth management space, the HSBC Bank launched its first unit trust offerings in August 2009. These “emerging market” trusts, covering the BRIC countries of Brazil, Russia, India and China, and Asia-Pacific excluding Japan, have proved popular. According to the HSBC’s Auckland-based head of personal financial services, John Barclay, this is because they were unique in the marketplace and Portfolio Investment Entities (PIE) compliant – offering better tax treatment.
Last August the bank launched three more diversified products, including what it called world selection fund that offers diversified global exposure to mix of asset classes and best of breed fund managers around the world.
“These are really the only products we provide for personal investment,” says Barclay. The bank does not offer an advisory service at the moment. The products are only available to the bank’s premier clients who are high-net-worth clients.” You need either minimum combined home loan of $500,000 or $100,000 in savings and investments to qualify.
Given the bank’s size – it’s the world fifth largest player in the wealth management industry – and its strategically relevant history – it was established in Hong Kong and Shanghai in 1865 – HSBC could become key player in New Zealand.
Kiwi managers wanting global look and feel for some of their fixed interest investments have turned their heads. “Our offerings are off-the-shelf HSBC products which are tried and trusted,” says Barclay. “We won’t be first cabs off the rank in terms of testing the market down here. We do, however, see the Asian and Pacific region as the engine room for future world growth and we are well placed to offer products and exposure to those markets.”
Corporate bondage
With interest rates seemingly, if not necessarily actually, so unattractive, Kerr thinks investors might look for corporate bonds and their rates of around seven percent. “But, there won’t be too many of them coming to the market in the immediate term,” he warns.
“Large corporates turned to the United States’ private placement market last year where they got 10- or 15-year money. Much of that potential investment opportunity has disappeared from the New Zealand market. Contact Energy, Mighty River Power, Transpower and Auckland Airport won’t be issuing bonds to local investors this year.”
That means shortage of investment options. And investors are cautious. When media company ACP Media tried to sell bond issue last year it failed and had to be picked up by the under-
writers. “The personal investment market did not recognise the name – despite the fact ACP is well known in Australia and publishes some high-profile magazine titles here,” says Kerr.
The opposite happened last year when The Warehouse, our home-grown retail chain, took its non-rated bond issue to the market. Investors took it up because it was household name.
The Christchurch earthquake has, for the time being, changed the name of the investment game. And the Japanese tsunami won’t help. The depressive impact on fixed investment rates may last for some time. Long-term interest rates, determined largely by the US market are, however, still going up. So individuals wanting higher yields may have to lock their money away for 10 years and abandon their previously more popular two- or three-year investment strategies.
Long-term investors, such as family trusts, might be wise to think in terms of 10-year investments for significant part of their portfolios. New Zealanders have traditionally scanned only short-term investment horizons, which is understandable given that for the past 20 or so years, short-term rates have looked more attractive. The lesson of the past two or three years suggests this approach has ended – for the time being at least.
So what about equity investment? Sharebrokers, bankers, investmen
