Where Has All The Money Gone?

By Mary Holm

Monday 26th November 2001

The day of reckoning has come for a Wellington reader and his wife.

"We thought we had done all the right things," he says. "In September 1992 we went to a well known firm of financial advisers and were recommended a portfolio of New Zealand and Australian unit trusts (currently 14), to give supposedly high growth."

The portfolio is, roughly: 64 per cent international shares, 17 per cent NZ and Australian shares,

6 per cent international specialty, 6 per cent NZ property, and 3 per cent cash.

The reader recently analysed how well he and his wife had done. "Our adviser agreed with the method I use," he says.

He found that for every $1 invested in 1992, the couple had $1.46 nine years later, including reinvested dividends.

Over the same period, an investment in the NZSE40 gross index, which includes dividends, would have grown to $2.45.

"Our effective rate of interest over the nine year is only 4.4%," he says. "If we deduct the 1.3 per cent which we are paying our adviser, we have only made 3.1 per cent.

When the reader pointed out that he and his wife would have been better off in the bank, the adviser "was noncommittal, and never gave us a really satisfactory answer."

"I would be very grateful for any comments you might have," he says. OK, here goes:

- I often get letters like this from people who have invested for too short a period to judge performance. But nine years is long enough.

- Diversification is great. But 14 unit trusts is over-kill.

Given that any good unit trust will, itself, be broadly diversified, six or eight should be plenty. And it would be easier to keep track of them.

- Most importantly, your portfolio performance certainly is disappointing.

If you had invested entirely in international shares [dash] as measured by the MSCI gross world index [dash] your $1 would have grown to more than $2.75.

OK, less than two-thirds of your money is, in fact, in that sector. Still, the rapid 1990s growth in world shares should have had a big impact on your portfolio.

And, as you point out, the New Zealand share market also did much better than you did. So did the Australian.

It's quite possible, of course, that you've changed your mix of shares, property and so on over the years. Perhaps you didn't have so much in international shares, in particular, a few years back.

But if you didn't, you probably should have. Your current mix of asset types looks about right, to me, for long-term high growth.

So why have you done so poorly?

Probably because too much of your money has gone into fees, commissions and so on.

For a start, there's the 1.3 per cent a year to the adviser. And I can't say I'm impressed either by his advice or the quality of communication.

You might also have paid quite high upfront fees. And some unit trusts charge pretty high ongoing fees, which eat big holes in returns.

Then there's investment choices [dash] by both the adviser and the unit trust managers. You say you were expecting to do better than the indexes. In fact, like many others, you've done worse.

All of which strengthens the case for index funds, which simply do as well as the market index they follow.

They're cheaper to run and so charge lower fees, and also pay lower taxes, than the active funds in which you are apparently invested. In the long run, I reckon they're a better bet.

You sound savvy enough to run your own portfolio. I suggest you fire the adviser, transfer most of your investments into world and New Zealand index funds, and do it yourself.

Mary Holm is a freelance journalist and author of "Investing Made Simple", commissioned by the New Zealand Stock Exchange to write an independent personal investment column. She can be reached at maryh@pl.net. Sorry, but she cannot respond directly to readers.

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