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Education needed to overcome formulas for failure

By David van Schaardenburg

Friday 5th May 2000

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The funds management industry's latest business growth data, as measured by the March 2000 IPAC Market Trends and Composition Report, point to a continuation of only a tepid pace in industry growth in sharp contrast to trends globally. This trend perpetuates the belief New Zealanders have only a moderate disposition for private savings outside their owner occupied property.

Like other developed nations, New Zealand is soon be faced with a population that will be increasingly aged and have an increased reliance on the government for retirement income (with the related fiscal pressures).

The most recent government-sponsored taskforce in 1997 indicated several financially punitive measures (on non-retirees) would have to be taken by 2015 for the same level of pension payments to be retained.

The retail funds management industry stands at $17.5 billion, growing at an annual rate of 14% over the last three years. The total funds management industry manages $44 billion in portfolio assets at December 1999, growing at an even less impressive average growth rate of only 8.5% since December 1996.

Compare this with the typical annual 25-30% growth rate of the funds management industry in Australia. This is being built on a platform of portfolio savings already three times the amount per head that prevails in New Zealand. It is therefore no surprise New Zealand corporates look across the Tasman for investment capital and in doing so increasingly base their operations offshore to reflect the changing primary domicile of their shareholders.

While there are many reasons for this disappointingly and concerning low level of portfolio investment by New Zealanders, one yet to be seriously considered is New Zealanders' relatively low appetite for investment risk - that is, how much are they prepared to tolerate fluctuations in returns over the short term to achieve higher longer-term returns.

The average New Zealand household savings remain more directed toward short-term bank deposits (various estimates vary from $50-60 million) and residential property, with modest allocations to more volatile but on average better performing investments such as shares and managed funds. Even in the New Zealand managed funds industry, 22% of savers'\ investments are allocated to capital stable investments.

Again this pattern is in contrast with overseas trends where in recent years developed nation household savings have been increasingly directed toward longer duration investments such as shares. In doing so these households have been able to better match the timeframes of their main long-term liabilities (retirement income) to their asset mix (shares, long-term government debt) plus achieve higher average returns.

Why are New Zealanders behind in the sophistication of their investment strategy thinking?

  • The cradle-to-grave socialist state (sustainable or not) reduces the urge to take action or the intensity of thought within the action process;

  • Relatively poor returns from many of New Zealand's larger company shares have created scepticism about whether share investing is a valid route for wealth creation (still some hangover from 1987 crash);

  • A mistaken belief New Zealand is still a high-inflation country (encouraging property investment);

  • A lack of investment education (and therefore ignorance) through limited market penetration by the investment advisory and funds management communities; and

  • A lack of investor optimism (think short and safe).

How can this mentality be changed?

First, a bit more open honesty by the politicians about the lack of sustainability of present retirement income policies (note the recent income tax hike to help pay for increased superannuation payments).

Second, education about the need to match liability and asset timeframes so savings are directed toward longer duration investments.

Third, increasing the understanding that for portfolio investors the world is your oyster - if you don't like the local market you can easily invest anywhere around the world using managed funds.

The debate over how to increase total household savings is still mired in academic debate with no resolution likely in the short term. In the interim we should not ignore the quality (or lack of it) in the thinking behind the management of existing savings and their related investment strategies. Here it appears only concerted education efforts will move New Zealanders to move away from existing formulas for failure.

David van Schaardenburg is general manager of IPAC, the investment strategy and funds management research company

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