Personal Finance

  • Mercer's David Scobie explains how referring to past performance has its uses when selecting investment products, but can be a comfort blanket with many holes

    By David Scobie*

    If you have attended a fund manager presentation or browsed related marketing material, you will be well aware of the prominent role historical returns can play in promoting a manager’s capabilities.

    Despite the ever-present health warning that “past performance is not an indicator of future performance,” there are plenty of theories in behavioural finance literature to suggest that investors allow past performance to influence their decisions.

    This is entirely understandable – it is one of the few pieces of readily available information upon which investors can base their decision-making. Therefore, it is important to consider whether there is any meaningful information in such data that can assist investors in consistently selecting the winners of tomorrow.

    Crunching the numbers

    Mercer recently examined the subsequent performance of a wide range of strategies based on their past performance relative to their peers.

    Performance over three- and five-year periods were considered over a 20-year period for survey universes including Global, US and Emerging Market Equities.  

    The study found that past performance is a very weak indicator of future performance, both in terms of the probability of future outperformance and the scale of the performance delivered. 

    Past outperformers and past underperformers both had close to a random (50%) chance of outperforming in the future.  (Preliminary analysis on the impact of survivorship bias suggested that it’s influence on the findings was relatively minor.)  More detail on the study can be found here.  

    This analysis should not be interpreted as suggesting that there is no persistence in performance for equity strategies at all.

    The range of outcomes within each past performance group is broad, and invariably there will be some managers within each universe that do have the requisite capabilities to deliver returns that can persist over a long timeframe.

    However, what this analysis does suggest is that, on average, allowing three- or five-year relative performance to influence manager selection is unlikely to improve outcomes for investors.

    It is important for investors to recognise that performance data, particularly over the shorter-term, tends to contain significant elements of market noise, luck and stylistic head- and tailwinds.

    Ultimately, performance attributed to these factors will be more susceptible to reversion in the future.  Investors may underestimate the role that these factors play in a track record and mistakenly interpret positive or negative past performance as a gauge of a manager’s skill.

    The reality is that skilled managers will experience periods of sustained underperformance due perhaps to an unfavourable style or bad fortune, while unskilled managers will have periods of strong performance for the opposite reasons.  

    Over the very long term, skilled managers are able to deliver attractive relative returns because their investment acumen will persist, while luck, noise and investment styles tend to balance out over cycles.

    To illustrate this point, consider the eight top-performing Global Equity managers in the Mercer database over the past 15 years.

    These managers have, on average, outperformed the median strategy by 2.7% p.a. - an excellent outcome for investors over such a long time horizon.

    Yet strikingly, despite their stellar long-term track records, these strategies have, on average, underperformed in nearly six of the 15 calendar years captured.

    An investor in these strategies would have been experiencing below-average returns 40% of the time, and those influenced by one-, three- or even five-year performance may have been inclined to give these strategies a wide berth at numerous points during those 15 years.

    Options for investors

    Being aware of one’s behavioural biases, in particular a natural tendency for performance chasing, is undoubtedly a good first step. 

    When undertaking fund manager selection, it is tempting to recommend constructing manager short-lists without any reference to track records, meaning that such data is less likely to dominate their perception of a manager’s skill.  

    However, this is an extreme approach. 

    When dissected with some sophistication, and in conjunction with qualitative analysis, past performance can yield meaningful insights as to whether returns have reflected true skill at, or not at, work.  (Qualitative analysis in this context refers to factors as the strength of the manager’s investment team, philosophy and process, and the ability to effectively implement stock ideas in the market.)    

    For example, Mercer considers questions such as the following:  Were the returns of a manager with a natural bias (versus the benchmark) to small cap stocks largely influenced by the fortunes of that market segment?  If the manager has a growth- or value-type investment style, does their performance resemble an index which reflects that inherent approach?  Has the investment team significantly changed, meaning that historical returns were delivered by capability no longer in place?  Was past performance achieved with the investment firm having far lower (or higher) funds under management, meaning future outperformance could be far more (or less) challenging? 

    These questions are not easy for the average investor to deliberate upon, but moving from “naïve” to “informed” analysis of past performance is critical to deriving useful insights.  The nature of this conundrum is summarised in the table below.

    Assessing Future Outperformance of Fund Managers

    Assessment method Level of difficulty Level of usefulness Tendency to be used by lay investors
    Qualitative analysis of the team, process, etc Moderate / high High Low / moderate
    Naïve past performance analysis Low Low High
    Informed past performance analysis High High Low

    The thinking described in this article underpins the growing area of Factor Analysis, where investors focus on detecting what particular return and risk factors may be at work on an ongoing basis and which drive investment performance.  If these factors can be identified, they could potentially be obtained at cheaper cost via systematic or more passive-like strategies. 

    “Not everything that can be counted counts, and not everything that counts can be counted.” - Albert Einstein

    In summary, investors’ behavioural biases mean that returns generated in the past are often used as an uncomplicated means to indicate what future returns may be. 

    Unfortunately, this is too simplistic an approach, and can be hazardous. 

    The historical performance of a fund manager has the potential to be a useful source of information, but if not overlaid with an understanding as to exactly how and by whom that performance was generated, reliance on such data may be detrimental to arriving at optimal portfolio outcomes.

    *David Scobie is Head of Consulting at Mercer Investments, based in Auckland.

    This article does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances.

  • Major government owned fund managers, holding $816m of shares in Facebook, Google & Twitter, call for the tech giants to take action following the live-streaming and sharing on social media of Friday’s Christchurch terror attacks

    A group of government owned fund managers that manage some $90 billion in behalf of New Zealanders, are calling for Facebook, Google and Twitter to take action following the live-streaming and sharing on social media of Friday’s Christchurch terrorist attacks.

    The group includes the NZ Super Fund, Accident Compensation Corporation, Government Superannuation Fund Authority, National Provident Fund and Kiwi Wealth. It's calling on other New Zealand and global investors to join them in engaging with the technology companies, arguing collective action will give the initiative optimal impact.

    NZ Super Fund CEO Matt Whineray says the efforts will focus on ensuring the tech giants fulfil their duty of care to prevent harm to their users and to society.

    “We have been profoundly shocked and outraged by the Christchurch terror attacks and their transmission on social media. These companies’ social licence to operate has been severely damaged. We will be calling on Facebook, Google and Twitter to take more responsibility for what is published on their platforms. They must take action to prevent this sort of material being uploaded and shared on social media. An urgent remedy to this problem is required," says Whineray.

    “We are in the process of contacting other New Zealand and leading global investors, seeking their support for this initiative."

    “Our responsible investment decisions are guided by New Zealand law and major policy positions of the New Zealand Government. We are therefore also investigating whether there have been breaches of any New Zealand laws or regulations by these companies, and monitoring potential changes to Government policy,” Whineray says.

    The group is also backing calls by the Spark, Vodafone and 2degrees CEOs for Facebook, Google and Twitter to take part in an urgent industry and government discussion to find a solution.

    Why not just sell? asked what the combined value of shares the five New Zealand fund managers holds in the three tech companies is worth and why they don't just sell them.

    "Our preference is to engage and use our influence as a shareholder to encourage the companies to take action - we have more leverage to progress these issues by holding shares and actively engaging and voting than by divesting. We believe social media can provide a significant public good, but this is in danger of being compromised through nefarious usage," a NZ Super Fund spokeswoman says.

    Below's the list of shareholdings the five have. They hold a combined $816 million worth of shares in Google's parent Alphabet, Facebook and Twitter.

    NZSF – Alphabet (Google) $319m, Facebook $164m, Twitter $11m.

    ACC – Alphabet (Google) $120m, Facebook $60m.

    GSF - Alphabet (Google) $21m, Facebook $10m.

    NPF - Alphabet (Google) $4m, Facebook $2m.

    Kiwi Wealth - Alphabet (Google) $70m, Facebook $35m.

  • Gareth Morgan takes issue with the Tax Working Group including Michael Cullen's assertion that the capital gains tax (CGT) is best described as a 'tax on capital income', saying there appears total confusion over what income actually is

    By Gareth Morgan*

    Tax Working Group head, Michael Cullen, asserts that the capital gains tax (CGT) is best described as a “tax on capital income”. Since when have capital gains been income? Show me any country’s national income accounts that include them in the measure of income.

    There appears to be total confusion on Cullen’s part over what income actually is. And that is dangerous because such conflating of concepts threatens to compromise the whole basis of our income/expenditure-based taxation system. That regime’s integrity is dependent on revenue-raising taxes being neutral to economic decision-making. Labour’s desired for capital gains tax is anything but – it will discourage investment, and with the exemption for owner-occupied property, further direct the nation’s scarce investment resources into housing. This is the antithesis of desirable.

    Firstly, understanding what income is, is critical to any literacy around the principles of income and expenditure taxation. As any standard economics and economic-statistics text will attest, income is payment (either in cash or kind) for production. Similarly, consumption, investment and saving denote how that income is deployed. The two sides add up. We have income tax that tax elements on one side, while GST taxes the consumption element of the other. Nowhere in this framework of income and spending accounting do capital gains appear as a source of national enrichment. So a tax on selective capital gains on realisation – especially one that does not provide tax deductions for capital losses – is nothing more than a selective transactions tax.

    Why are capital gains not in the national income accounts? If I decide to pay you more for your house than you paid for it, nothing has been produced, earned or consumed in that transaction. You have simply swapped your house for cash, and me cash for the house. The price reflects the willing buyer, willing seller equivalence. We have swapped assets and agreed on a price to do that. It could just have easily been for a lesser price than you paid and it’s no different to what we do all the time when selling each other our secondhand goods. It’s not our business; we’re doing it because we no longer want use of that good. Which of us has achieved a windfall? Who knows, who cares?

    And by the way there’s no GST and there’s no capital gains tax or tax deduction when selling other second hand goods for a gain or loss. Labour apparently thinks second hand houses should have a different rule. Its rationale? Because houses are “too dear”.

    Let’s look at it another way. I decide to buy your company from you. How do I arrive at a value for what I think it’s worth? I look at the potential future tax-paid earnings, apply some allowance for risk and what I could otherwise earn on my money in the bank, and thus assign a discount rate for that future stream of earnings.

    The result is a present value or cash price that I’m willing to pay now. If that price is above what you’ve spent building the business to, then that’s your good fortune, if it’s not, then you’ll accept it only if you’re happy to get the monkey off your back. Whatever – once again, a willing buyer, willing seller agreement is reached. Nothing is produced, earned or spent in this swap of factory for cash. We’ve both simply agreed to swap horses. No income is involved.

    And it’s these transactions, wherein owners agree to swap assets, that Labour is deciding to tax. Irrespective of whether the gain in value over the holding period of one owner is a windfall, or is a reward for effort (improvements), or is because the vendor is ‘in the business of trading’ – under Labour’s capital gains tax it doesn’t matter; it deems any gain should be taxed.

    Its proponents justify CGT as being an instrument to improve housing affordability – in other words, as a corrective tax rather than a revenue-raising one. Indeed in Labour’s case the rationale runs even deeper than that. As opposed to its indifference over how many cars, farms, businesses, or paintings I might own, the Left gets its knickers in a twist over how many houses one might have – even for own use. It has a deep-rooted preconception of what that number should be – one per household.

    This is why Cullen deems that one house being exempt of his CGT, no more. Why such prejudice arises only Labour can answer; there is no economic rationale for it. Indeed, if houses were sufficiently cheap, I’m suggesting most people would have multiple homes. Labour has transmuted the blight of expensive housing into a declaration of how many homes it wants people to own. It’s a strain of socialism that should not fit easily with most New Zealander’s understanding of free choice and democratic capitalism.

    Surely the government would be more productively engaged understanding and addressing why property is so dear, and addressing those causes, than issuing a decree on how many homes one should have, and bringing in a tax to enforce that.

    A recent edition of London’s The Economist (November 22nd 2018) produces some arguments as to what is so nuts about capital gains taxes. Its list is partial in my opinion and omits the greatest fallacies upon which such tax is founded. Nevertheless let’s add The Economist’s arguments to those that underlie the rejection of such policies.

    The magazine begins by stating that over recent years many rich world politicians have “woken up to the blight of expensive housing”. This of course applies to New Zealand and underlies Labour’s rationale for its tax review as well as for its self-defeating condition of excluding owner-occupied housing from that review.

    Auckland has one of the highest level of house prices to income in the world (along with Paris, Amsterdam, Vienna, Oslo, and London). The others are all subject to a CGT so where is the rationale that it’s a lack of CGT on 30% of our housing that’s uniquely the cause of high house prices? This reality is why the Cullen TWG was never going to be credible and why the tax literate within it’s number objected to the CGT.

    The Economist then goes on to blame “dysfunctional government polices” for the outbreak of house prices – especially how taxes on house transactions, like CGT on realisation, have fuelled the flames. The argument is that these slow transactions in the property market (because there’s a gap between what buyers pay and sellers receive – taxes), prevent people moving up and releasing housing stock for new entrants. The Economist advocates, as do I, that such transaction taxes be removed and instead annual levies be applied.

    This inclusion of taxation upon all income to capital (not just homes but all non-financial capital) properly integrated into the current income tax regime is what underlies the proposal in our 2011 book The Big Kahuna, and after which  was established as the flagship policy of The Opportunities Party in the 2017 election. Getting rid of this loophole would do more than anything else to take away the tax-driven fuel for expensive houses. But it would achieve much, much more than just make houses less expensive. Crucially it would facilitate a 30% cut in income tax on other income forms (currently over-taxed) and it would improve the appeal of investment in productive businesses (as opposed to houses).

    There really is no contest. Closing the tax loophole currently enjoyed by both owner-occupied housing and low return businesses and passing on the benefits of that to salary and wage earners and productive businesses, is day and night ahead of Labour’s capital gains tax proposals.

    *Gareth Morgan is a businessman, economist, investment manager, motor cycle adventurer, public commentator and philanthropist and was the founder of The Opportunities Party. This article originally ran here and is reproduced with permission.

  • Cyber security threat to New Zealanders and their businesses is growing even if it is hard to quantify, with CERT citing a significant increase in email extortion scams

    National Computer Emergency Response Team (CERT) NZ director Rob Pope admits the findings of its latest report, that New Zealanders lost $14 million to cyber security attacks in 2018, is just the tip of the iceberg.  

    CERT's latest quarterly report shows it received the highest number of incidents reported in a single quarter since it began issuing quarterly reports in August 2017. CERT received over 1,300 cyber security issues between October and December last year from businesses and individuals around the country.  

    In the last quarter of 2018 New Zealanders reported losses of over $5.9 million, bringing the total financial loss reported to more than $14 million in 2018.  Reports increased by more than 60% from the third quarter across every region in New Zealand, except Auckland, which saw an increase of 47%.

    But CERT director Rob Pope says the true scale of the problem is no doubt much larger.

    “We know that the data we have is just the tip of the iceberg, and we encourage more people to report to us so they can get the help they need to recover and we can get more information about how the cyber threat landscape is affecting New Zealand,” Pope says.

    He admits it isn’t easy quantifying the true size of the problem.

    “The challenge of understanding the scale of unreported incidents is a global issue. But the reports we’ve received this quarter show that these incidents are not only causing financial impact, they’re also affecting people’s confidence online. For instance, scam reports have spiked in quarter four, with a significant increase in email extortion scams,” Pope says.

    “This is where attackers email a seemingly legitimate threat and demand urgent payment to revoke it – examples we’ve seen include bomb threat emails sent to businesses through to threats of sharing embarrassing images.

    “Whether you’re an employee in a large company or checking your personal emails at home, receiving an extortion email can be a frightening experience. Even though it’s highly unlikely these threats would be realised, they can discourage people from participating in the online environment.”

    Netsafe CEO Martin Cocker says the figures in the CERT report aren’t surprising. The organisation is an independent, non-profit group which provides New Zealanders with information and support about online safety. 

    “CERT NZ is only a couple of years old and as it becomes more well-known they will see their reported numbers go up and up,” Cocker says.

    He says there’s always going to be a difference between the number of businesses and people who experience cyber security issues and the number who report it.

    But Cocker says Netsafe, like CERT NZ, it is also seeing higher numbers of people reporting such problems.

    “It’s not to say the internet is less safe,” Cocker says.

    He says it just that people are now more aware of who to contact if they are the victim of a cyber security attack.

    “When you see that CERT NZ has received five times the number of cases, a lot of that is just their growth,” Cocker says.

    He agrees with Pope that quantifying the true cost of cyber security is difficult.  

    “What CERT NZ can report, and Netsafe is the same, is directly reported cases. But the actual cost of cyber security in New Zealand will be a magnitude higher than that. And I don’t think there’s any doubt that the true cost would be in the hundreds of millions.”

    Cocker says the CERT report does highlight the growth in scams. He refers to the sexploitation scam which was a widespread cyber security issue last year.

    People received an email that claimed their computer had been hacked and that the scammer has recorded them using a porn website. The email would demand that they send a payment (often in bitcoin) to the scammer, or they will send the recording to the victim’s personal contacts which they claim to have access to. But Cocker says despite the number of victims that were targeted it often failed.

    “I don’t think it was very successful because most of the people targeted didn’t know how to pay in bitcoin.”

    Also see our series on the Commission for Financial Capability's Little Black Book of Scams here.

  • Commerce and Consumer Affairs Minister Kris Faafoi sticks to position that cap on total interest and fees will be most effective way to combat 'unscrupulous' lenders

    Minister for Commerce and Consumer Affairs Kris Faafoi.

    Commerce and Consumer Affairs Minister Kris Faafoi says the Government’s still plans to cap the total amount of interest and fees that can be charged on loans at 100%.

    That’s despite recent criticism from FinCap and Community Law Canterbury calling for a maximum interest rate that can be charged per annum by lenders. FinCap is an umbrella organisation for a number of financial capability and budget advisory groups from around the country. Community Law Canterbury is a non-profit organisation which provides free legal advice to people facing barriers in accessing justice. 

    Faafoi announced in October changes to the Credit Contracts and Consumer Finance Act (CCCFA) which he said were designed to crack down on predatory lending practices. It followed a review of the consumer credit laws by the Ministry of Business, Innovation and Employment (MBIE).  

    The proposed changes include the introduction of limits on the amount of interest and fees that can be charged on high-cost loans to prevent people from accumulating large debts, as well as tougher penalties for those who break the law, including irresponsible lending.

    And Faafoi remains committed to the proposed legislative changes he’s planning to introduce to Parliament next month.

    “The Government has announced a cap on total interest and fees of 100% of the amount borrowed. This means that, for example, if someone borrows $500 they won’t have to pay back more than $1,000 over the lifetime of the loan. I believe this is the most effective way to stop those who would prey on vulnerable borrowers.”

    This will only apply to "high-cost lenders" with the aim being to prevent unmanageable debt and financial hardship from accumulating large debts from a small loan.

    Faafoi says he looked at the feasibility of having a maximum interest rate and fees that could be charged per annum by lenders in interest and fees as suggested by FinCap and Community Law Canterbury.

    But he says international experience suggests it would be counter-productive and instead having a maximum total amount that can be charged in interest and fees on a single loan is more practical.

    “My position has remained consistent that we will not sit by as people get dragged into debt spirals, where a small loan grows into large debt, due to accumulating interest and fees,” Faafoi says.

    “I believe the cap on total interest and fees will be most effective in combating the unscrupulous lenders. I think when you’re making any change it’s important to consider the whole effect. International experience shows that moving towards an interest rate cap would make things worse for people – I cannot in all conscience advocate for measures that could do that.

    “We know from the experience in the UK and Australia that interest rate caps can move people towards high-cost lenders charging this maximum interest rate and to bigger loans. This can have a higher cost of credit as well as trapping people into bigger loans for longer periods.”

    It follows the release late last month of survey results looking at credit and high-cost debt by FinCap and Community Law Canterbury. The survey was carried out between December 10 and December 26 last year.

    In the survey report they call for the introduction of a per annum maximum interest rate and tougher measures to fight the spread of non-bank and high cost lending.

    “There needs to be limits on total interest that can be charged on borrowing. There should also be a maximum interest rate [that can be charged] per annum."

    They say the Government isn’t going far enough with its proposed amendments, even though the actual legislation hasn’t even been introduced to Parliament.

    “The CCCFA is still not reaching far enough into NZ's lending culture to protect the most vulnerable members of society. Need a lower interest option and limit access to clients of how many loans they can have at a time. There should be much stricter controls on loan sharks offering high-interest loans and a cap on interest rates. Finance companies should be audited rigorously and frequently. They should be made to conform to the ethical requirements laid down by the ministry which should have greater powers to hold companies to account. Consumer credit should be based on your ability to comfortably repay the loan. If the loan is going to affect your core necessities in life, impact on the care and nurturing of your children, than the loan should not be offered.”

    Faafoi says despite the criticism he welcomes the debate.

    “We may disagree on the best measures to take but I will work with anyone who has the aim of helping families avoid crippling debt. On the weight of evidence and in particular learning from where interest rate caps have been tried overseas, I firmly believe the better solution is to cap total interest and fees paid. The measures we have proposed are the best option to stop the unscrupulous lenders," he says.

    “We must be careful our good intent, in practice doesn’t force vulnerable families into larger debt and cause more harm. That is why our focus is on ensuring the spiral of debt is addressed via a cap on interest rates and fees.”

    The release of the Salvation Army’s annual State of the Nation report last month highlighted the growing effects of fringe and non-bank lending.

    The paper’s author, Salvation Army social policy analyst Alan Johnson, says the data it collected shows the industry is continuing to grow.

    “Over the most recent year of available data (to 30 September 2018) consumer lending by non-bank lending institutions grew by almost 10% in inflation-adjusted terms to $4.54 billion. Over the past five years, this type of lending has expanded almost 39% in inflation-adjusted terms and by almost $1.5 billion in nominal terms.”

    Johnson says the Salvation Army decided to broaden the focus of this year's report to include debt and fringe lending under the social hazards section, which also includes alcohol consumption, drug taking and gambling.

  • Labour more discreet than NZ First in gauging public opinion on the introduction of a capital gains tax through an online poll

    Prime Minister Jacinda Ardern

    Labour and New Zealand First are conducting online polls to gauge public opinion on a capital gains tax (CGT).

    Labour is asking people to sign petitions via its website, either in support of or against a CGT.

    Respondents are then invited to indicate how they believe any tax revenue collected from the introduction of a CGT should be spent.

    The options it presents are: an income tax cut, changing the tax threshold, making some income tax free, support for small businesses, innovation grants for businesses, a cut to KiwiSaver tax rates, or increasing spending on alleviating child poverty.

    The tax survey on the New Zealand First website is more in-depth.  

    It asks respondents to indicate which tax issues they’re most concerned about; a CGT being one of seven taxes presented.

    It then invites respondents to spend about five minutes answering questions about any property they own and their understanding of the current tax system.

    It ask respondents questions like whether they believe the tax system is fair, whether they know how much tax they pay on their income, whether they support a CGT, whether they are aware three CGTs already exist in New Zealand, whether they’re aware of the FiF regime that taxes some capital gains on overseas investments, and whether they know the two-year bright-line test was introduced by the previous National-led Government.

    While the survey is featured prominently on New Zealand First’s website, Labour hasn’t promoted its poll or “petitions” on its website.

    Asked why Labour is conducting a poll, Prime Minister Jacinda Ardern said: “I wouldn’t call it a poll, because it’s hardly scientific when you ask Labour Party supporters for their opinion on an issue.

    "We’ve been very open since the Tax Working Group came back – we’re looking to hear people’s views on what the Tax Working Group has proposed.”

    Since the TWG last month recommended an extension of the taxation of capital income, government ministers from Labour and New Zealand First have been coy, while those from the Green Party have made their support for this very clear.  

    Prime Minister Jacinda Ardern has positioned herself as being responsible for “building consensus” among the Government’s coalition partners, rather than being an advocate for a CGT.

    Meanwhile New Zealand First Leader Winston Peters, who previously opposed the extension of a CGT, has remained tight-lipped, making the odd comment signalling he’s mindful of the impacts on farmers and also not making the system too complicated.

    The Government is expected to present its response to the Group’s recommendations in April.

  • Harmoney founder says $50 million securitisation programme with BNZ doesn't mean any changes for retail investors

    BNZ has got into bed with peer-to-peer (P2P) lender Harmoney via a $50 million securitisation programme.

    Harmoney founder and co-CEO Neil Roberts told that BNZ is the senior note subscriber in a securitisation facility adopted by the P2P lender. Securitisation is the conversion of an asset, such as a loan, into marketable securities, typically for the purpose of raising cash by selling them to other investors.

    "We have BNZ buying senior notes. So if you think about a dollar into securitisation, they take the senior 70 cents, senior being that they are the first to get paid. And then there's a series of notes that sit below that. There's a mezzanine layer and that is taken by another Australasian entity [Roberts says it does not want to be named], and the final piece is called the junior note where Harmoney puts in an equity layer which is the first loss layer," Roberts said.

    Retail investors, or lenders, who typically fund about a quarter of Harmoney's loans, won't be affected by the securitisation programme, said Roberts.

    "For retail investors there is absolutely no change. All we have done is scale back some of the wholesale [or institutional] funding that has been going on and introduced our own securitisation programme," he said.

    "We do operate under a [Financial Markets Authority] licence. That licence says we have to have a fair, transparent marketplace and the process is in place to make sure that is happening." 

    Harmoney says the securitisation programme will reduce its costs and support investment in its technology development for the benefit of both borrowers and investors.

    Roberts said Harmoney's plan was always to have wholesale funding contribute to a robust marketplace. Overseen by a trustee, Harmoney Warehouse Ltd was set up as a special purpose vehicle to issue the securitisation programme's notes. The idea is the securitisation notes are sold to debt market investors at some point, he added.

    Harmoney launched in September 2014 with a five-year licence issued by the FMA under the Financial Markets Conduct Act in July that year. An FMA spokesman said the regulator undertook a "targeted consultation" on the removal of term limits for licences last year. The spokesman said the FMA is in the final stages of that consultation process and will unveil the outcome shortly.

    Roberts said Harmoney's in talks with the FMA around renewal of its licence.

    Confirmation of Harmoney's securitisation programme comes after Roberts confirmed last year the company had taken on the ability to lend its own money through its own platform.

    The chart below shows Harmoney's funding mix.

    *This article was first published in our email for paying subscribers early on Thursday morning. See here for more details and how to subscribe.

  • After defeat in the Court of Appeal, ANZ wants to take fight to prevent potential action by the FMA against the bank on behalf of collapsed 'Company X' investors to the Supreme Court

    By Gareth Vaughan

    The country's biggest bank could be the target of just the second use by the Financial Markets Authority (FMA) of powers it has to step into retail investors' shoes and take legal action on their behalf.

    A tantalising Court of Appeal judgment details this in between heavy redactions. The redactions are because ANZ New Zealand has sought leave to appeal the decision to the Supreme Court and to maintain confidentiality over the judgment.

    "The Court of Appeal judgment clarifies that it is appropriate for the FMA to disclose information to investors to further the FMA’s investigation, and to help assess whether a claim under Section 34 of the Financial Markets Authority Act may be appropriate, provided proper steps are taken to ensure confidentiality. Section 34 of the FMA Act enables the FMA to exercise the rights of action of investors. The High Court had previously determined the disclosure would not be for a permitted purpose," the FMA says.

    According to the Court of Appeal judgment, the FMA obtained documents from ANZ as part of its investigation into "Company X" and the failure of Company X causing loss to investors. The regulator did this to obtain responses and any additional information from Company X investors, to determine the next steps that should occur to enable Company X investors to evaluate the merits of a claim against ANZ, and to enable the FMA to consider and determine whether to exercise its powers under s34 of the FMA Act.

    "The parties approached the Court to consider the proper application of certain provisions of the Financial Markets Authority Act which applied to the FMA obtaining confidential documents and how those documents could be used. The High Court provided a ruling in early 2018 which upheld confidentiality. The Court of Appeal has taken a different view.  We have sought leave to appeal to the Supreme Court," an ANZ spokesman said.

    ANZ has argued there's no basis for civil claims against the bank.

    To date the FMA has only used its s34 powers once. This was against Prince and Partners Trustee Company, which admitted a series of failings in its role as trustee of Viaduct Capital Ltd, which went into receivership in 2010. The civil proceedings brought by the FMA against Prince were settled for $4.5 million.

    "It is the first time the FMA has brought a case under section 34 of the Financial Markets Authority Act 2011. These powers enable the FMA to exercise the rights of action of investors, in this case, the Treasury and investors who were not covered by the Retail Deposit Crown Guarantee Scheme," the FMA said of the Prince and Partners case in 2017.

    In 2012 then-FMA CEO Sean Hughes told the FMA was considering using its s34 powers against another failed finance company, Hanover. however this didn't eventuate. (There's background on the s34 powers here and here).

    The Company X Court of Appeal judgment says the FMA began receiving complaints from Company X investors and immediately started an inquiry. It contacted the five major New Zealand banks in order to identify who Company X’s bankers were. ANZ responded the same day confirming it held accounts for Company X.

    "[Redacted] [T]he FMA sent a further notice to ANZ asking it to confirm whether ANZ held accounts for further entities associated with [redacted] [Company X]. ANZ responded [redacted] confirming it held bank accounts for two of the entities named in the notice," the judgment from Justices Forrest Miller, Mark Cooper and Raynor Asher says.

    It goes on to say that, having conducted an inquiry, Company X's liquidators got legal advice on the prospects of a claim against ANZ for participation in Company X’s "[redacted] breaches [redacted]."

    "However, they had concluded that, while there may be a potential claim [redacted], it was not the role of the liquidators to bring it. Rather, the claim was properly brought by the investors, or by the FMA under s34 of the Act. The FMA subsequently began a focussed inquiry into ANZ [redacted]. [Redacted] [I]t issued two more notices to ANZ under s25 of the Act requesting further information [redacted]. After reviewing the material provided, the FMA obtained an external legal opinion about the prospects of a claim against ANZ. In January 2016 the FMA’s inquiry into ANZ [redacted] became an investigation," the judgment says.

    Meanwhile, the judgment talks about investors potentially teaming up to take action with the assistance of a litigation funder.

    The Court of Appeal judgment says s34 of the FMA Act recognises civil redress against financial markets participants may help to meet the public interest in promoting and facilitating the development of fair, efficient and transparent financial markets. Furthermore, the fact the FMA was given the ability to bring or take over a civil right of action indicates Parliament’s recognition that such claims are in the public interest. 

    "We consider that s 59(3) permits the FMA to disclose documents to investors to allow both the FMA and investors who have suffered loss, and may have claims against ANZ, to assess and pursue claims on a fully informed basis. The FMA can disclose the information and documents to [third parties] [redacted] providing it obtains enforceable confidentiality undertakings. In pursuit of fair and transparent markets it is appropriate for the FMA to provide information to investors so the FMA can get their feedback to aid the FMA’s investigation, and to consult with investors in the exercise of its decision-making powers under s34, provided proper steps are taken to ensure confidentiality," the judgment says.

    *This article was first published in our email for paying subscribers. See here for more details and how to subscribe.

  • Tax Working Group Chair kept on the job for 4 months longer than initially planned; Michael Cullen says he's there to bat for the integrity of the report not the Government 

    Michael Cullen

    Michael Cullen will remain the Chair of the Tax Working Group (TWG) for longer than he was initially contracted to be in the role.

    Finance Minister Grant Robertson said the Government extended Cullen’s appointment to June 30, because it was “aware there would be extended public discussion on the report”.

    He acknowledged this public discussion “has played out”.

    Cullen was originally supposed to be in the role until the TWG delivered its final report in February. This was when the other 10 members’ contracts ended.

    However, the Government on January 30 – two days before it announced it had received the TWG’s final report – offered to extend Cullen’s contract.

    Robertson told of the extension when it asked him whether he was aware beforehand of an interview Cullen did on Radio NZ on Wednesday morning.

    Cullen’s commentary

    Cullen in the interview debunked National’s claim that under the TWG’s recommendations the average person’s KiwiSaver would be worse off.   

    He did so further to sending a statement to media on Monday night explaining how National hadn’t accounted for recommendations that would reduce tax in its calculations.

    Up until late Wednesday afternoon, this was the only official statement Cullen had sent to all media further to the TWG's final report being released to the public on February 21.

    Cullen in the interview went further in saying: “I’d be much more likely to believe Sam Stubbs [of Simplicity] and the people he’d be using to do costings on a KiwiSaver scheme than Mr Bridges, because this is all part of this rather hysterical ‘destroy New Zealand way of life’ reaction to the report.” (See Simplicity's workings here).

    He also provided a fair bit of commentary, saying he believed the Government wouldn’t reform the tax system in such a way that would leave KiwiSaver members worse off.

    He commented on the difficulties the TWG faced figuring out how to tax capital gains on Australasian shares, when currently these receive concessionary tax treatment compared to foreign shares.

    “It would not at all surprise me if there were some changes to those proposals around Australasian shares," he said.

    Cullen also said history would suggest that the Opposition, if elected into government, wouldn’t overturn changes it previously spoke out against.

    This evoked a response from National Leader Simon Bridges, who tweeted: "No ifs, no buts, no caveats, I will repeal this CGT as Prime Minister of New Zealand."

    Policy, not politics

    Challenged by on whether he was going beyond his remit and wading into politics, in such a way that it appeared he was going in to bat for the Government, Cullen said no.

    “It’s certainly my job to wade into policy. It’s not the same thing as politics."

    Cullen said there was “nothing particularly unusual” about him responding to National’s KiwiSaver commentary.

    He acknowledged he couldn't respond every time someone said something "a bit daft”, but said: “When there’s egregious mischief-making by plucking numbers out of the air, I think it’s important that people understand firstly that those numbers are almost certainly wrong, and secondly, that there are various ways in which any difficulties can be resolved…

    “It’s a bit silly to be scaring people too much at this point.”

    Asked whether it was his job to be debunking myths or allaying fears, Cullen said yes.

    “My job is to defend the work of the Tax Working Group… It’s not the job of the Government to defend an independent report given to it.”

    He said he was defending both the report and the process.  

    He acknowledged the need to do so in the case of National's KiwiSaver comments, noting these would receive more media coverage than other arguably misleading responses to the report. 

    Cullen likened’s observation that some of his comments in the RNZ interview mirrored the Government's caution, to a “conspiracy theory”.

    The Government has refrained in recent weeks from really marketing the need for tax reform. It's instead underlined its focus on "consensus-building" ahead of announcing its response to the report in April.

    Cullen said: “I’ve always been aware that this is an extended process, of which the report is only one stage. Therefore it’s very important for people to understand that there is a long way to go before decisions are made."

    He expressed his frustration over the other 10 members of the TWG being “treated like a pack of dummies” by those who implied they had nothing to do with the outcome of the report.

    He said the Group’s members are experts in their fields, and while they are now off the job, his role is to "defend the integrity of the report”.

  • Nikko NZ launches an online goals-based saving platform incorporating personal professional advice in a new digital investment tool aiming to take the mystique out of real investing

    ID 18288102 © Karenr |

    While investment products like KiwiSaver have become ubiquitous, and other financial products and opportunities get launched and seek investors attention, regulators worry about a dearth of appropriate advice. There are less than 10,000 financial advisers in New Zealand, only about 2,000 of whom are authorised financial advisers. Most seem to work for a QFE.

    One way this shortfall can be addressed is by using "robo advice". This is online advice tailored to your personal circumstances.

    Such algorithm advice is fairly common overseas, but relatively new to New Zealand. But such services need regulatory approval. And one of the first to get FMA approval here is being launched today (Wednesday) by fund manager Nikko Asset Management.

    For Nikko, this is unique too. They are a global fund manager primarily providing services to institutional investors. Nikko AM operates in 11 countries and has more than US$200 bln under management.

    Nikko has been successful in New Zealand, managing more than $5 bln for institutional investors and other fund managers. And they recently nabbed both the 2018 Morningstar and the 2018 Fundsource fund-manager-of-the-year awards.

    Now in New Zealand they are also now turning to services aimed at small retail investors using automated digital advice (robo advice). This is apparently the only country where they are branching out in a retail direction.

    The launch is with a product called GoalsGetter.

    GoalsGetter is an easy-to-use digital investment platform that lets users set up, track and monitor their investment goals. Users can set multiple goals, view long-term projections based on different contributions and timeframes, and choose between many Nikko AM NZ Funds. For those who need more assistance choosing a fund, the platform can also recommend funds that are most suitable.

    But the underlying fund management is still done by human managers in Auckland; it is only the advice platform around those funds that is automated.

    The GoalsGetter tool doesn't ask you for personally identifying information for much of the useful goal setting, risk profile identification and income basics. You can learn a lot even to this stage. But when you come to invest, clearly you need to supply further personally identifiable information. At this point you can save goals so you can come back to them later. And you can push ahead to transact. After the first time, which collects and verifies your identity, all subsequent interactions are as easy you would expect from an online app.

    Easy is one thing, but kudos to these developers; the Nikko process has some grunty substance behind it. If you make choices Nikko (as a top fund manager) thinks are unwise, it will warn you and suggest a better way. And the tool won't let you make inconsistent decisions, prompting you to deal with any inconsistency. And behind it is all the regulatory requirements from the FMA ensuring you see and deal with your obligations to look at key things, like Product Disclosure Statements

    In the end, robo advice is really just an integrated calculator that takes your wishes into account, and tries to prevent you making dodgy choices. Yes, it is Nikko giving the 'advice" (that is, setting the parameters) and they have an interest in this market.

    But in the end, most people don't want or need to know all the technical background drivers (just as you don't need to know exactly how your mobile phone or smart TV works), but you probably do want to be pointed in the right direction by someone who does know. Robo advice services are all online and can be accessed at any time. And you can compare the features and results of a number of them (just like a mobile phone choice).

    So far there are few other robo-advice platforms to compare the Nikko one with. Being the early one from a major, it will no doubt set the benchmark.

    It might be even better if the robo advice pointed to a wider range of funds than just Nikko's own set. But it is Nikko's initiative, and they do have cred in the New Zealand market place. And you use it knowing its DNA. Even when it recommends Nikko funds in a risk profile, any user can choose to check the alternative options from other fund managers. The Nikko tool is free and it doesn't preclude that option.

    Setting up and tracking goals is an essential first step to building the financial resources to achieve them, whether they are for going of a fancy holiday, buying a car or a house, or the big one, ensuring you have enough for a [long] enjoyable retirement.

    In all cases, you should seek professional advice.

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