Investing in NZ Stockmarket

[Rabbit]

With the introduction of Kiwisaver, I was just wondering if this would give a filup to the NZ stockmarket.

I was thinking of buying an NZ mutual fund prior to Kiwisaver starting, has anyone done any research into NZ based mutual funds? what did they find out? are the charges reasonable? Are they ranked in anyway in terms of performance. Do they operate investment trusts as well as mutual funds?

[Super_BQ]

Rabbit, I can only give you an idea of what my relatives in NZ thing about the NZ stock market.

In short the NZX is too junvenille of a stock exchange compared to the much larger overseas exchanges. I say this because it's a known fact that almost all kiwis prefer to invest in real estate than to ever touch buying shares.

The NZX has a long history of fraudulent listed companies, Briley shares is one I can think of. I believe the guy dumped the company in NZ and fled to some overseas (singapore?) to continue his saga. From a background in following the NYSE, Nasdaq, & CDX, exchanges, I find it hard to follow what companies on the NZX do and their ration - in most ways I ask where are the ethics when NZ CEOs are trying to 'maximise shareholders' wealth'.

Accounting disclosures in NZ are quite different (or lacking?) in comparison to listed companies in the US. Annual reports don't seem to emphasis on EPS (earnings per share) but instead, tend to focus more on how much dividends were paid. If a person believes that dividends is more important than EPS (if annual reports in NZ ever show EPS data?) then it's no wonder why so many people in NZ prefer real estate investment than the stock exchange.

You'd be hard pressed to find managed funds in NZ that follow the ethics of Warren Buffet (BRKA - Berkshire Hathaway;NYSE) My cousin last year was offered a super-annuation scheme by her employer. After close analysis, the maximum amount allowed to contribute to the given mutual funds is pretty poor at best (like 3% of the worker's salary) - better to leave the $ in the bank in term deposits. I havn't fully studied Kiwi Saver yet but I do know that if an employee can't contritube enough of their earnings in an investment, by the time the MF managers take their commissions out, there usually leaves very little compounded annual returns. Not only the gov't has to establish an incentive for kiwis to invest in the stock market, but also their employers have to contribute as well. But offering limitations of like max. 3 - 5% of annual income is really a joke.

When I left Canada 10 years ago, wage earners were allowed to contribute up to 18% of their annual income into a shares, managed funds, etc. It was not common for new uni graduates contributing far more than 30% of their annual income despite there would be no additional tax benefit.

Of matter of interest, there were no restrictions on where a Canadian resident could invest that portion of their income. If the person drank Starbucks coffee everyday, it made sense that they could also buy SBUX shares on the Nasdaq. Unfortunately this won't be the case for people in NZ due to recent FIF tax changes. Whether Starbucks is a better company to invest in than Robbert Harris (Australia) is to be told.

Before you invest into any managed fund or listed company on the NZX, make sure you understand what the company does. You're not just looking at dividends. You must look for insider trading data and how comprehensive do they release their quarterly reports? If the share price rises and insiders are selling off their ownership in the company, this may be that they expect share prices to fall back. Though.. I don't know of any NZ website that shows insider reports freely like say Yahoo Finance does for any listed NYSE/Nasdaq company. I could write a book on the tell tale signs of any company but I think that is beyond the scope of this thread.

BQ

[MarkS]

Hi Super BQ,

I really hope that people reading your post don't actually believe that what you say is true. I thought about going through line-by-line to put right some of the things you say that are untrue, half true or ridiculous generalisations, but that would really take too long. So, a few thoughts:

1) NZ is a small country. NZ has a small stockmarket. The two are linked - economies of scale are of course very important in the financial markets. "Juvenile" is very harsh, if not a slur.

2) The US has a long list of fraudulent companies. The UK has a long list of fraudulent companies. Is there a stock market anywhere that doesn't have a long list of fraudulent companies?

2a) Enron. Worldcom

3) EPS figures can be obtained from nzx.com, or in the financial pages of the newspapers on a daily basis

4) You're fully entitled to put whatever percentage of your income you like into managed funds. If your cousin's workplace scheme has limits, she should complain to her employer, then open up a second scheme herself if she so wishes for the excess. You can't blame the NZX for that

5) KiwiSaver is primarily intended to force people who are not financially literate into making some provision for the future. Its low limits doesn't stop people who can afford to from putting money into retirement plans, and it does make it politically possible to get the scheme going. I'm not a big fan of it myself, and will be opting out of my own workplace scheme most likely, but that doesn't mean it doesn't have a place. Time will tell.

5a) Don't forget pensions work differently in this country to how they do in the UK (and how I think they do in the US). In the UK they're tax free on the way in, grow tax free, and are then taxed on the way out. In NZ they're taxed on the way in, taxed as they grow, then are tax-free on the way out. Due to the commutative nature of multiplication, these two approaches are broadly the same in the long run (the UK system is better for high-earners, the NZ system better for low-earners. There is some political debate in the UK about where high earners should be disproportionately rewarded in this manner). The big advantage of the NZ system is that as the government doesn't give you any tax boost on the way in, they can't apply controls on how you get your money out.

6) I have a similarly low opinion of the forthcoming changes to the FIF rules. However, the present rules effectively give a big tax advantage to investing overseas. Would you expect a Canadian to pay lower tax to pay less for investing in the US than in Canada?

6a) The maximum cost of the new FIF rules is 1.95% (i.e., 5% * 39%) of your portfolio per year. If the NZ stockmarket is as poor as you believe, that must be a price worth paying. It is of course also roughly similar to the amount of tax you'd pay if that money was just sat in a savings account, which doesn't strike me as being completely unfair

7) You're right that company information is much harder to come across here than it is in North America or the UK. The data sources do exist, but on the whole they have to be paid for. It's a shame that NZ isn't up there with the two most sophisticated markets in the world, but there you go.

I found the whole tone of your post a bit unpleasant to be honest (enough to motiviate me to make my first post here!). The NZ market is very different to what you may be used to - I don't think that the scattergun approach of inaccuracies that you've come out with is particularly useful, and certainly not much of a useful response to Rabbit's question!


Talking of which: Rabbit, I wouldn't have thought that you should assume any particular boost to the NZ market from KiwiSaver, and you certainly shouldn't make any investment decisions based on such hopes.

I'm personally not a big fan of managed funds, there are plenty of stats from the UK market to show that the vast majority of them lag their indexes, particularly once charges are taken into account. I'd suggest you might want to think about index trackers - they typically have much lower charges, which will make a huge difference over time.

The cheapest way to buy index trackers is via what are known generically as ETFs, or in NZ specifically as Smartshares. (The UK equivalent are iShares). Take a look at http://www.smartshares.co.nz for more info (and forms so that you can set up monthly saving plans if you so wish). They have products that track the NZX 10, mid cap and NZ50 portfolio indexes, as well as two that track Australian indexes. I personally would never invest in managed funds unless forced to (e.g. as I'll probably have to do if I transfer my UK pension), but I will definitely be buying Smartshares at some point.

Hope that's of use anyway.

Mark

[Ana&Steve]

Just wanted to share that one of the biggest draws about NZ for us is that they aren't a "sophisticated market". Yes, I want a secure future and retirement, and will learn about the steps I need to take to make it so, but I want to get away from worrying about my money every day (many times a day) as I do here. I swear it's making my hair fall out! It seems strange to bring the rest of the world's bustle and stress to a relatively tranquil pair of islands in the middle of nowhere.
Ana

[suebeenz]

Thanks Mark. Very informative.

[Rabbit]

Thanks to everyone for their comments, very informative.

I note with many of my investments held in global mutual funds, the charges are excessive typically 1.5/1.7%.

In terms of new investments I have started to move towards Ishares - no spread and low charges.

Trackers are a good way forward, in terms of spreading risk and offer low charges, as do investment trusts, but their value versus net asset worth can fluctuate based on market sentiment.

As stated in an earlier post, the net pensions contribution limits for higher earners seem alot more atractive in the UK, AUS and other countries.

In terms of Kiwisaver, I gained the impression that recent rule changes had introduced a tax free contribution limit? 4% default, 8% optional.

What we still need to see happen in New Zealand are two things.

- Options for those in later life to make a greater contribution to their pensions
- An attractive investment climate for asset classes other than property.

The current regime is uncompetitive in the western world, certainly for higher wage taxpayers.

For highly skilled and saught-after people NZ can be a double wammy, both in terms of earned income and the ability to make provision for retirement in later life - thus uncompetitive.

The 100% pure marketing campaign, in terms of attracting new immigrants with capital, and high earning tourists, must be a key driver in keeping the economy afloat.

In the jargon, I suppose one could say there are structural imbalances in the economy.

Let's hope the reforms that are needed come soon - before I buy a house.

[MarkS]

Just a quick post from me.

Don't forget that pensions (or "super" schemes) in NZ work very differently in NZ to the UK (I can't comment on US etc as that's not something I know much about, but I believe they work similarly to the UK). In the UK much is made of the "tax relief" that pensions attract. This really is incorrect - pensions largely attract "tax deferral", you may not pay it now, but you will pay it later. This benefits the middle class, who are probably 40% tax payers now and will be 22% tax payers in retirement. It benefits far less those who earn less than c. £32k per year, or the very rich.

The NZ system (leaving aside Kiwisaver) means that you get no tax incentives for investing right now. However, the (positive) flip side of that is that you also don't have the restrictions that UK pensions place on you (i.e. you can access your money at anytime if you need it [unless you've chosen a product where you've agreed to lock yourself out]). So, should the government take steps to make investment more appealing? I certainly think they should. However, I would be more happy to see them go down a route akin to the UK ISAs (where you put a limited sum from your post-tax salary into an account, but it grows tax free and can be drawn tax free at any time) rather than the UK pensions (where you can put a larger, limited sum from your pre-tax salary into an account, where it grow tax-free but has restrictions as to when you can withdraw it [i.e. after aged 55 at the youngest] and is taxed on the way out).

Personally, I feel the UK and the NZ tax systems each have positive points. What I think is the problem with the NZ system is that the concept of a capital gains tax is political anathema - no politician will dare introduce such a thing (witness the recent cries that the new FIF regulations are a "disguised CGT"). I do feel that current (and proposed) NZ tax law is not as fair as it should be, and there's plenty of work that should be done there.

I do however strongly feel that people from the UK, the US or Canada who complain about not being "allowed" to invest enough in retirement planning really are missing the point and showing a lack of knowledge - the NZ system (for better or worse!) really is different and you have to deal with that reality!

cheers
Mark

(hmmm - not such a short post after all!)

[Super_BQ]

I would like to clarify that though the Kiwi saver may be an attempt to encourage New Zealanders to invest, I think it falls short to what Canada/US has to offer. In Can one can REDUCE their taxable income up to 18% regardless of their employer's contribution or not. ie, you an be totally self employed and go buy shares in Bangkok and would still be eligeable. Furthermore, you can roll over the capital gains from the stock portfolio into your 1st home 100% tax free.

I think some are missing my point about the FIF rules. Other developed countries aren't near as discriminatory as to say where you can put your retirement in. Though NZ is a small country, this doesn't stop the fact that more and more international companies (besides Australia) are and have setup business in NZ but at the same time, NZ tax laws says "Hey, don't go buying into those companies because you'll be better off investing competing NZ companies"

MarkS - my rebuttal

1) Sorry 'juvenille' is inappropriate. Nevertheless, small country brings higher risks - would it be good financial advise to put all your eggs in 1 basket (in New Zealand?)

2) You're right, all stock exchanges have some history of fraud. Enron and Worldcom have been big losers but the key issue i'm relating at is based on historic returns on the indices. If any # of fraudulent Enrons existed in the US, then these disasters would reflect on the DOW or S&P indices. But historically this hasn't been the case where US indices had underperformed the NZX.

3) no comment
4) explained above - 2nd scheme doesn't provide any tax incentive compared to putting the extra cash into real estate.
5a) The biggest problem with NZ tax system is once you've earned your tax free capital gain, you can't give it away! In another thread I discussed how the gov't imposes $27,000 gifting limit but there's no limited on how much income you earn or tax on the input end. It's also not the same to tax the compound gains under new FIF rules vs. lump sum taxing of capital gains upon retirement/sale of shares.

6a) Don't forget the new FIF makes no allowance for your overseas portfolio when it has a negative paper loss, they're only interested in taxing the paper gains. Pay tax on 20% gain 1 year, next 2 consecutive years lose 30% in a market correction, then taxed on a 10% gain the following year - still leaves you in a negative return portfolio despite the tax being paid.

I do however strongly feel that people from the UK, the US or Canada who complain about not being "allowed" to invest enough in retirement planning really are missing the point and showing a lack of knowledge - the NZ system (for better or worse!) really is different and you have to deal with that reality!

What I find is most new immigrants don't see the better or worse in each country until it's too late or in most cases, unpredictable changes in tax laws. Sure every country is different but that doesn't mean the small country has to try and prove it's own merit. For many problems that NZ faces, I often wonder why these problems can't be solved by looking at what other developed countries have done - don't re-inventing the wheel. If the gov't wants to discourage kiwis from investing into real estate, then why not look at others instead of imposing limitations of investment - after all we live in a globalised economy. The only real lack of knowledge is the country not studying what other nations have done.

BQ

[MarkS]

Hi Super_BQ,

You make a few good points I agree with, and a few more that I'm not so sure about. It's interesting what you say about Canada, sounds like the government has put in place an interesting scheme.

In the UK you can now reduce your taxable income by 100% by contributing to a pension scheme, completely regardless of an employers contribution. The flip side of that is the restrictions that the government puts in place on how you use that money. Once capital goes into a pension, you've lost access to most of it forever. You can get hold of 25% at aged 55 at the earliest, the rest must be used to purchase a lifelong annuity. You certainly can't use it to buy a house. The justification of this is that the government is giving you a valuable tax break, and so they have the right to tell you what you can do with the money. (In reality, the tax break is not as valuable as it seems, due to the taxation of the money that comes out of the annuity). I personally would not bother with putting money into a pension in the UK unless there was an employers contribution attached - I'm not bothered by the tax "relief", but I am bothered about getting free money from my employer! Anyway, to get back onto the point I'm trying to make - in NZ you don't get the tax relief on money going into investments that other countries offer, but the big plus point is that you also don't have the restrictions that the tax relief brings with it!

I think you're missing my point about the FIF rules! Yes, the new rules are overtly discriminatory, and that's clearly not a good thing. The problem stems from NZ's unusual method of primarily taxing investors on dividends received, rather than capital gained. NZ companies also pay a very high dividend rate compared to the world average. Combine these two factors, and the net effect is that an investor is generally taxed more for investing in New Zealand than they would be for investing in the "grey list" countries such as the UK or US.

Now, it doesn't seem unreasonable that the government should attempt to rectify that situation. Where I am in complete agreement with you is that the solution they've come up with is crazy. Taxing of paper gains is insane! And not having any tax relief of paper losses just seems unfair.

I'm glad you agree that "juvenile" was a bit harsh! No, I wouldn't advocate putting all my investment eggs in the NZ basket - I'll probably go for something like a 25/75 NZ/Australian split for my investments down here (and will leave my investments in the UK alone for as long as I can)

A study on the effect of fraudulent companies on a stock market's return would be interesting. You're making assertions without any evidence here though - can you show that the NZX has underperformed due to fraud?

As an aside, Yahoo's data for the NZX10 only goes back five years, which makes long term comparisons difficult. However, this graph of the NZX10 against the American S&P 500 is interesting!

http://au.finance.yahoo.com/q/bc?t=m...m&q=l&c=%5ESPX

I don't know much at all about the gifting rules here, so I can't comment on that one. It does seem that the NZ tax system is rather unfair in that situation, yes.

I think your point in 6a is that you can, over a few years, have lost money and still have to pay tax on that. (I make it that in your example you'd be down 11% having paid about 4% of your initial investment in tax, working below). I completely agree that is a pretty unfair situation, and one that doesn't arise if the system taxes actual gains and losses, rather than notional, paper, changes in the value of your investments.

It is unfortunate that the current system seems to actively encourage real estate investment and actively discourage sensible, diversified stock market investment!
That could be rectified if NZ moved to a CGT based system such as the UK's (which has tax free limits and schemes that mean in practice only the richest few percent of people actually need to pay CGT). It sounds like no politician is prepared to contemplate doing such a thing.

I agree with you that subtle and not-so-subtle changes in tax law between countries can trip up immigrants. It's also the case that the FIF tax changes may put me in a slightly worse financial position long-term compared to the current system. It's good that you're highlighting some of the pitfalls of the new system here - however, I really think that you've exaggerated the negative aspects in some of your posts, and so the good points you've been making are in danger of being lost!

Sorry to ramble on again, I hope that there was some information in here that people will find useful

cheers
Mark


*****
Say you start out with $1000, and have a 20% gain. Now you have $1200, and a tax bill of $23.40 ($1200 x 5% x 39%), leaving you with $1176.6. You then suffer a 30% decline over two year, leaving you with $823.62 (and no tax bill, as you don't pay if you can prove a loss). You now make a 10% gain, giving $905.98, less a tax bill of $17.66, so you now have $888.31 - a loss of $111 having paid $41 in tax.

[Super_BQ]

Hi Mark - great discussion!

Interesting view about the UK system as my cousin and her partner have been given the OK to immigrate there - whether they will can save and bring back more $ in 5 years time is to be told.

I do think that bringing in capital gains tax in NZ can not be political suicide. The NZ gov't can slowly implement a form of capital gains specifically targetted at real estate (if they're serious about getting people away from investing in several properties). They can designate the 'principal' resident home as being capital gains exempt but rental properties and the such can slowly be exposed to the capital gains tax. For example in 2 years time they can introduce a 25% taxable capital gain. In Canada, only 50% of any capital gain is taxable - I remember 10 years ago it use to be 75%. A similar varying of the % taxable can easily be implemented in NZ with minimal consequences.

As of interest, the US has full 100% capital gains tax on everything including their principal house they live in. However, the home owner can deduct the mortgage interest off their tax return every year. This has never been an allowance for in Canada - deduction of interest expense from 1 venture to offset gains in another income adventure. Though i've heard of people in Australia doing a lot of this "negative gearing" but I think that's all changed now - and NZ IRD doesn't recognise it either? In a different thread, i've mentioned that NZ does have full capital gains tax on any real estate venture as long as IRD can prove the purpose of the venture was speculative. We often read in the newspaper of house so many people are caught buying & selling real estate with the assumption that the gains are 100% tax free.

The NZX top 10 has had incredible gains in the past 5 years indeed. I hope you were able to lock in some of those gains

BQ