Newsletter December 2009
December 1, 2009
Government Guarantee
The Government recently announced changes to the deposit guarantee scheme, none of which will affect investments that are currently protected by the guarantee. Institutions that are currently participating in the Retail Deposit Guarantee Scheme have until December 4th to accept the revised deed, which will come into effect on January 1st. If an institution declines to accept the changes to the scheme, any deposits taken after January 1st will not be guaranteed. Deposits already covered by the scheme will not be affected. These changes are separate from the extension to the scheme announced in August. The main change is that participating institutions will be able to offer guaranteed and non-guaranteed deposits. Presumably the extra rate offered for a non-guaranteed deposit will equal the fee that does not have to be paid to the Government, plus a margin for the extra risk.
Offering both guaranteed and non-guaranteed investments is an essential step in removing the guarantee altogether. At some stage the Non-Bank Deposit-Takers have to be able to stand on their merits, without the behaviour-altering backstop of the Government Guarantee. The new laws that impose stricter requirements on the non-bank sector should help restore confidence, however I think it will be years before that confidence is completely restored. I would liken the finance company collapse to the sharemarket crash in 1987. There are investors who will never own a share again after 1987, and I’m sure there will be investors who will never again consider a finance company, regardless of its strength in the future. Having the word “finance” in a company name now only seems to invoke negative sentiment.
Depositors will need to think very carefully about investing in non-guaranteed deposits in the early stages of the withdrawal of the Government Guarantee. There is a huge amount of money due to flow out of the finance companies in October next year, and we need proof that companies have the strength and investor support to cope with that. The obligations the Government is now imposing on the non-bank sector should go some way to toward helping investors (and advisers) analyse the merits of continuing to support these companies.
Asset Allocation and Model Portfolios
Last month I looked at some model portfolios, and suggested the percentage of an investor’s funds that might be allocated to each asset class.
Individual Investments
How far you diversify your portfolio is something that can be debated infinitely. Most people would recognise the need to spread their investments to reduce risk; however you can take that theory to the extreme, and diversify your portfolio into mediocrity. The administration can also become quite a burden if you have a large number of individual investments. With the exception of Government Guaranteed investments, bank deposits, and highly-rated fixed interest investments I suggest you don’t have more than 5% of your portfolio invested in a single security.
Bank Deposits
I recommend splitting your bank deposits between at least two banks. I have no reservations about the main trading banks, so your choice will be based on the rates offered, together with your historic relationship with the bank. Aim to split your bank deposits into different sums with varying maturities, so that you have money falling due at different times throughout the year. Always keep some cash at call – the online or phone accounts offered by the likes of Rabobank, Kiwibank and UDC are good for this purpose.
Fixed Interest
As with bank deposits, aim to divide your bond portfolio into varying maturities. Try to avoid having all your bonds maturing at the same time so you are not exposed to reinvesting all your funds at the bottom of the interest rate cycle.
Shares
The choice of shares to include in a portfolio will be based on your objectives, (growth versus income) and your tolerance to risk. We usually look overseas for growth and here in New Zealand for income. New Zealand companies historically pay more of their profits in dividends than overseas companies. Although I advocate buying and holding shares (rather than actively trading) you should always be prepared to regularly review your holdings and make changes if necessary. Far too many people refuse to sell a poor-performing share simply because it is trading at less than they paid for it.
Fixed Interest
Goodman Property Trust
We still have a small amount of the Goodman Property Trust bond available.
- 5-year term (June 19, 2015)
- Senior ranking and secured against $1.14 billion of property assets
- Minimum interest rate of 7.75%
Trustpower
Trustpower is issuing $125 million of five-year and seven-year fixed-rate bonds, with the provision to accept oversubscriptions of up to $50 million.
The main features of the offer:
- Two maturity dates (December 15, 2014 and December 15, 2016)
- Interest rates are 7.60% for the 2014 bonds and 8.00% for the 2016 bonds
- Interest will be paid quarterly
- Minimum Investment of $5,000 – thereafter in multiples of $1,000
- Closing date – December 18th
PLEASE CONTACT THE OFFICE AS SOON AS POSSIBLE IF YOU WOULD LIKE TO RESERVE AN ALLOCATION OF THESE BONDS
Commissions
Debate is raging about commission payments to financial advisers, and the potential for conflicts of interest. I have touched briefly on this topic in the August newsletter, and will revisit the subject next month. We are paid commissions by the finance companies and the various bond and share offerors (for example Goodman will pay 1.50% commission on their bond, of which we receive half). In the past the finance companies have paid advisers a commission on a maturing debenture that is reinvested with their company. It appears now, however, they will only pay that commission if it bears our stamp. If you are renewing a debenture with South Canterbury Finance, UDC, Marac, or Equitable, and you believe we should be paid a commission (perhaps we have advised on the merits for or against, or have raised an issue in the newsletter), please bring the application into our office to process.
DISCLOSURE STATEMENT AVAILABLE ON REQUEST AND FREE OF CHARGE
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