JUNO Summer 2020

In the last two decades, the average one-year term deposit rate in New Zealand has ranged from nearly 9 per cent in 2007 to the current low of around 1.25 per cent in 2020.

This shows investors had it easy in New Zealand in the golden days before the Global Financial Crisis. They didn’t really need to take any risk at all to earn a modest return.

Kiwis got attached to those returns – and to term deposits.

Today, however, it’s a different story.

For investors looking to achieve a respectable return on their cash, the days of a 5 per cent term deposit are well behind us. Realistically, if you’re earning 1.25 per cent, with inflation and taxes, your real return is likely to be close to zero.

Term deposits were popular with savers and Kiwis close to, or in, retirement. But if you’re only getting rates of around 1.25 per cent now, that won’t give you enough income to live off in retirement. Many people with money invested in term deposits are looking for better returns.

Bonus Bonds closing

Plus, another group is looking for a place for their money. Over a million of us chose to gamble a little with our savings returns by investing in ANZ’s Bonus Bonds scheme.

Kiwis had around NZ$3.25 billion in the scheme, where investors received no interest on their investment, but went into

a monthly draw to win $1 million, plus other smaller amounts.

Bonus Bonds was attractive to people who didn’t want to take on much investment risk. On the other hand, many missed out on potential returns.

Now the scheme has closed to new investments and it will wind up over the coming months.

That leaves two sets of investors looking for a safe haven for their money, without too much risk.

One alternative that’s gaining popularity now is a conservative fund. Many savers see it as a place to get better returns, without large exposure to risk.

What’s a conservative fund?

A conservative fund is a type of ‘managed fund’. In a managed fund, your money is pooled with other investors’ money and is spread across different kinds of investments.

A fund manager chooses how the fund is invested according to the rules set out for each fund, and each investor owns a proportion of the total fund.

It’s kind of like a basket of fruit. You don’t own one banana or one kiwifruit, instead you own a proportion of the total contents of the basket. As the basket goes up in value, you share in the increase in value.

High risk versus low-risk

There are many types of managed fund, which all invest at different levels of risk.

You can invest in a high-growth fund, which can give a better return but which is riskier to own and more prone to big dips – and big increases.

You can pick a balanced fund with some high-growth and some slower growing assets.

Or you can pick a conservative fund, which offers less of a return but is relatively low risk.

It’s conservative funds which are seeing an upswing right now. That’s because they appeal to people who traditionally invested in term deposits or Bonus Bonds.

Benefits of conservative funds

Investors like conservative funds for these reasons:

• They give you access to a variety of investments which perform in different ways at different times – so your eggs are not all in one basket, like they are with Bonus Bonds.
• They’re lower risk, but are designed to offer higher returns than a term deposit.
• You can access your money within a week or so of requesting a withdrawal. We call that ‘liquidity’. Compare that to term deposits, which are often locked in for years, where breaking the term can reduce your returns.
• If your fund is doing well, you may get regular dividend payments into your bank account.

But there are things to note:

• There’s no guarantee of the returns you’ll get for a conservative fund. Compare this to term deposits which give you a fixed, although currently very low, rate of return.
• You may have to give notice of your intention to withdraw from the fund. This can be days or weeks.
• If the financial markets aren’t doing well, your regular dividend payments may not be very high, although over time they’ll usually beat a one-year term deposit.
• There will be fees to pay for the management of your fund, and for the underlying investments in it. These are often a percentage of your returns.
• Many fund managers ask for a minimum investment of, say, NZ$10,000. Check the details of the fund you might be interested in to see what the minimum investment is.

Low-cost investment platforms like Sharesies and InvestNow allow entry into many of these funds at a low cost.

What about the risk?

Term deposits are very low-risk, and the rate of return is always fixed. Lower risk usually means lower returns, and this is true for term deposits right now. After tax and inflation, you’re not getting much back at all.

Conservative funds are still lower-risk options. They’re diversified, meaning not all your money is invested in higher-risk shares.

There’s often investment in cash, bonds, and other investments, too.

Compare different managed funds on the government’s www.Sorted.org.nz Smart Investor online tool.

Check the risk indicators on conservative funds before you invest, and check they align with your risk profile and goals.

For example, Pie Funds’ Conservative Fund is recommended for investors with a minimum three to five-year investment time frame.

That fund returned 4.87 per cent annually for the five years to 31 August 2020, after fees and before tax.

As you can see from this, even with tax taken out, the long-term return has been higher than a current term deposit offering.

Need higher returns?

When you work out your risk profile, you might even find you’re comfortable taking on even more risk, say in a balanced fund, to benefit from potentially higher returns over a longer time.

So, if you’re looking for a new home for your money, or simply want it working harder for you, there are other options to explore.

Mike Taylor is the founder and chief executive of Pie Funds Management Limited, a fund manager. He’s the portfolio manager for the Pie Conservative Fund.

Definitions

Liquidity: How easily an asset can be converted to cash.

Managed fund: In a managed fund, your money is pooled with other investors’ money and is spread across different kinds of investments.

Any advice in this material is general in nature only and does not take into account any particular person’s financial objectives, goals or circumstances. If you would like some tailored advice, we recommend you see a financial adviser. To access our product disclosure statement, please visit www.piefunds.co.nz. Information is current as at 21 September 2020. Past performance is not a guarantee of future returns. Returns can be negative as well as positive and returns over different periods may vary.