Lessons in counterparty credit risk

Investing

Opinion: Investors in the FirstChoice Cash Fund scheme need to ask ASB some hard questions

19th Dec 11, 5:01pm by Roger J Kerr

KiwiSaver investors who have their money managed under default scheme managed by ASB Group Investments/Sovereign (FirstChoice KiwiSaver Scheme) should be asking some hard questions about the management of their money.

A recent Sunday Star Times article (11 December 2011) by financial reporter Rob Stock highlighted that FirstChoice had $376 million of their Cash Fund invested in bank deposits with their own parent bank ASB Bank. Rob found it difficult to get full information on the managed funds and when I attempted to take a look at FirstChoice’s investment statement on the website the document failed to open.

As total Cash Fund investments in all KiwiSaver schemes are $3.4 billion, it is hard to imagine FirstChoice’s Cash Fund being much larger than $600 or $700 million.

Therefore, it appears that over 50% of the First Choice Cash Fund is invested with one counterparty bank (the parent ASB Bank).

Any cash investment portfolio should have a maximum limit of no more than 10% or 15% exposed to one counterparty at any one point in time, to prudently manage and spread credit risk.

You would think a bank should know something about credit risk.

Apart from a totally inappropriate credit risk position, FirstChoice’s returns on their Cash Fund are pathetic at 2.70% for the last 12 months and 3.10% for the last three years.

By definition, cash investments must mature within 12 months (both interest rate re-set and legal maturity date to get your money back).

FirstChoice appear particularly lazy in just placing the funds on deposit with their parent bank, instead of investing in a range of securities from Commercial Paper to other fixed interest securities maturing within 12 months.

Recent credit rating downgrades for the Australasian banks should have decreased the dollar amounts of maximum credit limits for individual bank names in these KiwiSaver Cash Funds.

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* Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com

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6 Comments

by steven | 1st Jan 12, 10:17am 1325366245

When I was 17 I took out a life policy that was a reasonable deal....it gave me a small life insurance policy and a start on the retirement savings ladder. The dis-advantage I found was that after some years (15 or so) it was sold to another "insurerer" and sold again a few years latter, and again....by this time it was delivering pathetic returns...but there was nothing I could do, I was locked in. From taht alone I determined that I would do my own thing and bought shares and in turn noted that it was also a con, but at least I was the master of my own destiny. In 2008 I lost 22% on that first policy.....18months ago however I sold all my shares, im on the region of 15% up..ie those shares have dropped 15% odd since...though I missed the highs in 2008 when I should have sold.....oops...ah well...

So my experience is, do it yourself and pay attention...hence kiwisaver is a con IMHO....its run by mostly inadequate managers and you cant see the risk they are taking....and we now go into volitile times with huge risk of losses and the sharks will be feeding.....and will jump out in seconds.....only the foolish and greedy play in this pool (markets) right now.....

Great thing about a depression of course is deflation, the gains are tax free...if you can keep your cash away from the defaulters (ie banks going bust) and the Govn....which is the nasty part....very hard to do IMHO.

regards

by Gummy Bear Hero | 1st Jan 12, 11:00am 1325368845

When I turned 18 the local life insurance salesman come knocking , and I told him to clear off ..... why do they want to sign up teenagers , kids with no dependents , and the likelihood of a long life in front of them ? .....

...... fees ! .. Big fat juicey fees & commissions for themselves personally , and for the useless companies that they represent , too .....

Thank God all that has changed ...... and now we have Kiwisaver instead ( ahem.. cough , cough ) ...

by steven | 1st Jan 12, 11:12am 1325369551

At 17 it made sense with compounding interest gummy, and in a stable expanding system it still does somewhat.....ie the saving bit....the problem is with hindsight its now obviously a poor bet....and we are no longer in a stable growing system....I have learnt....and I will try and teach that (learning, have an open mind, make your own decisions, and being a little bit sensible) to my children.......

Signing up at 17 gave my a small life insurnace policy that also paid out if I could no longer work due to serious injury in my then present job type so I could re-trian in something else. It also had a with a profits scheme that compounded into a decent amount at 60~65. Otherwise I would have spent it all on beer and chasing women.......like everyone else in my class....I just had a little less beer....and one gf/wife at a time was/is enough.....

;]

These days kiwisaver is just a rort that future Govn's will exploit to pay for infrastructure....its just another tax really.

regards

by Gummy Bear Hero | 1st Jan 12, 11:22am 1325370136

I was lucky enough to observe how aunts , uncles , neighbours , Gummie's parents and grand-gummies had been poorly served by these insurance companies ...

.. I kind of figgered out early on that stashing the fledgling Gummy fortune into Muldoon's inflation proof bonds , and into shares would prove more lucrative ... if for no other reason , than no middleman clipping the ticket .....

..... oddly enough , it was daddy gummy who got the insurance guy to visit me . Decades of losing money to these leeches hadn't diminshed his belief in having the might of the insurance industry behind one .....

by Black Celebration | 3rd Jan 12, 9:36am 1325536576

Not sure whether the comments are directly relevant to the article, but heigh ho.

The hybrid life insurance/savings policies sold to people in the past damages KiwiSaver far more than 100 Hujliches. Those same organisations are now trying to sell KiwiSaver, so people are right to raise an eyebrow.

The trouble with Life Insurance is that you will never hear from a happy customer, certainly not the policyholder (because they're dead). Yet payouts do happen frequently and that money does help the people left behind enormously. Quite rightly, the beneficiaries will not be on the phone, thanking the insurer. Why should they? That's what insurance is and that is what it does. After all, insurance companies make a lot of money and they are reinsured themselves anyway.

Most policyholders don't claim on it - which is good news - but they look back and seethe at the rotten returns on the investment because the policy takes the life insurance premiums from the returns. I remember the future expected returns quoted in the mid-80s. 10% p.a. was quite a reasonable expectation. It really was. So the projected compounding figures over 30-40 years looked amazing. So people are right to be disillusioned.

KiwiSaver doesn't have any insurance element to it, so the savings don't pay for life insurance.

by Wolly | 3rd Jan 12, 9:48am 1325537280

They evolved from mutual non profit social support institutions...and mutated into beasts of prey.