Let the capital markets to do the heavy lifting

This month $680 million was injected into the New Zealand economy through the winding down of the Bonus Bonds scheme.

It has created one of the country’s biggest investment opportunities.

With inflation tipped to get to around 6 percent next year, interest rates increasing, changes in tax treatment of housing investments and the bright line test now set at ten years, it’s time for people to look more broadly at where they put their spare money.

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Bonus Bonds was created by the Government in 1970 as a way to encourage New Zealanders to save more. Back then, most ordinary Kiwis only had interest bearing term deposits as an investment option and for fun relied on horse racing and the Golden Kiwi lottery.

Bonus Bonds was a unique product - instead of earning interest or receiving investment gains or losses, each eligible bondholder had one entry into a monthly prize draw.

By the late 2000s the top prize in the monthly draw was $1 million.

Kiwis embraced Bonus Bonds with gusto. Who didn’t get one from their grandparents at Christmas?

Half a century later 1.3 million people held bonds totalling $3.4 billion.

"It’s time for people to look more broadly at where they put their spare money."

Stewart Taylor, Acting Managing Director, Funds Management, ANZ NZ.

For many people Bonus Bonds was an attractive, lower risk option. Somewhere safe to park their money, it was easy to access, with the added bonus it might win them a life changing sum of money.

But it also offered low returns for most bond holders. So as the economy opened up and became deregulated in the 1980s many looked to the share market.

By 1987 New Zealand was a nation caught up in a euphoric share market bubble.

Share clubs were commonplace, and some investors even borrowed against their homes to get a piece of the action.

No one seemed too bothered that many of the new arrivals to our stock exchange were companies that didn’t really seem to do very much.

Then the market crashed.

Some of those investors, scarred by the 1987 crash, never returned to the share market, even though New Zealand’s share market has grown up and is far different to the one of three decades ago.

Our regulators have teeth, markets are transparent, stock exchange listing rules are tougher, and the bonds and shares in our capital markets are issued by high quality companies that make things and provide services we value and can actually understand.

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But in the decades since the 1987 crash (and in part in response to it) Kiwis became wedded to investing in property.

They saw it as the way to grow wealth and save for retirement.

Property is an important asset, but the investment menu has more than one dish.

Thankfully the arrival of KiwiSaver in 2007 has helped to start changing these attitudes.

In 14 years, we’ve collectively amassed over $80 billion through a combination of our own contributions, those of the government and employers, plus some healthy investment returns.

It’s great that many people are using KiwiSaver to begin saving for retirement. But retirement can seem a long way off, and there’s often the need to save more.

Life has a habit of throwing a lot of opportunities and challenges at us in the intervening decades – weddings, trips of a life-time, health scares, unemployment, or paying for children’s education.

By not letting our markets do more of the heavy lifting, it’s taking many Kiwis too long to achieve their financial and life goals.

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Putting some of your savings into the capital markets through investments funds (or managed funds as they are also called) can help spread your risk and bolster your returns.

They can now access a broad range of high quality, diversified investment funds that have a range of risk and return profiles suited to their investment horizon.

These funds are like KiwiSaver funds, and are often managed by the same providers.

They pool your money with other investors to allow you to invest in diversified portfolios of shares, bonds, property, infrastructure and cash, across local and international markets.

They are transparent, robustly regulated, managed by experts and liquid.

For some providers, you can invest initial and ongoing amounts as little as $1.

Unlike KiwiSaver, investment funds are “unlocked”, which means in most cases you can access your money within about a week.

Like any investment, you should look around and seek advice either from the provider or by talking to an independent Financial Adviser.

People should  read the product disclosure statement and any other information from the provider - understand who’s involved, what fees and tax you’ll need to be paid, where and how  money will be invested and what the risks are.

Kiwis are now able to access capital markets in a transparent, cost-effective way to help them save for whatever it is that matters to them.

Investing in an investment fund is a way for people to let the capital markets do some of the heavy lifting to achieve their financial goals.

Stewart Taylor is Acting Managing Director, Funds Management, for ANZ NZ.

This information is general in nature and is not to be construed as advice.  Investors should seek professional advice. To the extent permitted by law, ANZ does not accept any responsibility or liability arising from your use of this information.  Investment performance is not guaranteed and may be negative or positive.

This article first appeared on stuff.co.nz