By Jenée Tibshraeny
Can you relate to this?
You have $5,000, $30,000 or $150,000 sitting in a savings account.
You’re keen to invest it, but don’t have the knowledge or inclination to trade shares in individual companies yourself. Plus, you’re all about diversification, so don’t want to put all your eggs in a few baskets.
You could hire someone to buy and sell shares for you, but you realise this is too expensive unless you have hundreds of thousands of dollars to invest.
You could invest in a managed fund, much like many KiwiSaver funds. However you need to be willing to pay more in fees to have a fund manager constantly move your money around in an attempt to maximise your returns. If you go down this route, you need to believe your fund manager can outsmart the market.
If you're of the mind this isn’t possible, or the fees you pay to use a fund manager outweigh the higher returns you’re expected to receive, investing in funds that simply track the market could be the way to go.
Big picture stuff
There is a raft of material out there that debates managed versus passive investing. I won’t wade into this argument now.
But when you do your own research, you should remember New Zealand has a very different market to the US, where a lot of financial literature comes from. Investing in index-tracking funds is much cheaper in the US due to there being more competition, economies of scale and investors having greater access to markets. You may consequently not save as much in fees going down this route than the likes of passive investing evangelist/life coach Tony Robbins may have you believe.
Another thing to be mindful of when considering investing in index-tracking funds is that the market has been performing well since the 2008 Global Financial Crisis. So people you talk to who have gone down this path in the last 10 years are likely to be boasting about their returns.
The question is whether they can sit tight and ride out the wave when the market turns and the values of their investments fall, while their mates with managed funds possibly suffer softer blows.
Some of the newer index-tracking products available in New Zealand haven’t yet seen a major downturn, so are essentially yet to be tested.
Getting into the detail
With this in mind, if you see merit in passive investing, this second instalment of my Generation Rent Investment Guide is for you.
I have put together a table comparing the nuts and bolts of a few products that enable you to do so. Click on the headlines to see the product disclosure statements for more information.
| ASB Investment Funds | Simplicity Investment Funds | SuperLife Investment Funds | SuperLife Sector Funds | SuperLife ETF Funds | Smartshares ETFs | |
| Who | Part of the Commonwealth Bank of Australia Group. | NZ not for profit company owned by The Simplicity Charitable Trust. | Subsidiary of the NZX. | |||
| What | Funds with different portfolios made up of cash, bonds, shares and property to reflect different risk/reward profiles. | Funds with portfolios limited to individual sectors and assets classes such as cash, bonds, shares and property. | ETF funds that invest almost entirely in the equivalent Smartshares ETFs. There are cash, bonds, shares and property ETF funds available. | ETFs listed on the NZX. 20 track the performance of specific indices; 3 are actively managed and aim to outperform specific indices. There are cash, bonds, shares and property ETFs available. | ||
| Number of funds | 5 | 3 | 6 | 14 | 23 | 23 |
| Access to global markets | Yes | |||||
| What it costs to get started | Contribution fee: 0.45% of amount invested. | Nothing | Application fee: $30 when you first invest in an ETF. |
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| Minimum investment | $2,000. Funds only available through ASB’s Wealth Advisory Service, subject to ASB's eligibility criteria. | $10,000 | No minimum | $500 | ||
| Minimum you can add to investment | $500 lump sum. $100/month or $50/fortnight if part of regular savings plan. | No minimum | $250 lump sum or $50/month if signed up to regular savings plan. | |||
| What adding to your investment costs | Contribution fee: 0.45% of what you invest. | Nothing | ||||
| ASB Investment Funds | Simplicity Investment Funds | SuperLife Investment Funds | SuperLife Sector Funds | SuperLife ETF Funds | Smartshares ETFs | |
| How to switch investments | Fill in application form to switch lump sums of at least $500 between funds. | You can switch online but can only hold one portfolio at a time. | Login and switch online, or fill in an application form. | Sell units in one ETF, buy units in another ETF. | ||
| What switching investments costs | Nothing | Brokerage fee + application fee if you're investing in an ETF you haven't invested in before. | ||||
| How you earn income | Returns automatically reinvested. You can set up regular withdrawals from the Conservative and Conservative Plus funds. | Returns automatically reinvested. You can set up regular withdrawals. | Returns can be automatically reinvested into the fund they came from, or invested into a NZ Cash fund (designed for investors making regular withdrawals). You can set up regular withdrawals. | Distributions paid quarterly or six-monthly depending on fund. Automatically reinvested, unless you choose to receive distributions as cash. | ||
| Annual fees | From 0.97% to 1.25% of the value of your investment | $30 + 0.31% of the value of your investment. | $12 admin fee (spread across all funds) + from 0.45% to 0.59% of the value of your investment | $12 admin fee (spread across all funds) + from 0.39% to 0.94% of the value of your investment. | $12 admin fee (spread across all funds) + from 0.42% to 0.63% of the value of your investment | From 0.33% to 0.75% of the value of your investment |
| How you withdraw your money | You can withdraw lump sums of at least $500. If in the Conservative and Conservative Plus funds, you can withdraw regular amounts of at least $100 fortnightly or monthly. | You can withdraw as much as you like. | You can sell some or all of the units in the ETF you've invested in. You have to do this through a broker not Smartshares. | |||
| What it costs to withdraw your money | Nothing | Brokerage fees. IE: ASB Securities: 0.3% brokerage fee (minimum $30) ANZ Securities: $29.90 plus 0.40% |
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| Returns over past year, after fees and tax, as at May 31 | 3.43% - 8.71% |
Not applicable as Simplicity has not been around for a year. | 3.04% - 9.99% | -11.96% - 18.13% | -3.45% - 24.90% | -2.54% - 23.99% |
| Tax rate | Based on your prescribed investor rate (PIR), which is dependent on your regular income and investment income. At 28%, the top PIR is below the top income tax rate of 33%. | |||||
Here is my take on the various options:
Investing in a fund with a set portfolio vs going down the Exchange Traded Fund (ETF) route
Putting your money in an investment fund through the likes of ASB, Simplicity or SuperLife enables you to let the experts do the work to put together a portfolio with an asset mix that matches your risk/reward profile - much like when you invest in a KiwiSaver fund.
If you think you’re capable of putting together a portfolio that gives you the right level of diversification and exposure to risk, ETFs or SuperLife’s sector funds may be appropriate. These options give you flexibility and agility, which could be useful if you understand the market and have a clear strategy.
All of the options can be used as longer-term savings vehicles, in that you can make regular contributions to your investments. ASB will however charge you a 0.45% contribution fee.
The other general difference is accessibility. All of SuperLife’s products don’t require you to have a certain amount to invest, you only need $500 to invest in Smartshares ETFs, and you need $10,000 to invest in Simplicity’s investment funds.
In theory you need $2,000 to invest in one of ASB’s funds, but interest.co.nz believes that in practice you need much more. Interest.co.nz has asked ASB for an explanation around who its funds are targeted towards and why, but hasn't received one.
Show me the money
This is where things get really difficult.
Ideally when comparing returns across products designed for longer term investors, you should look at what their annual rates have been over a number of years. The problem is many Smartshares ETFs, as well as Simplicity’s funds, haven’t been around for that long, so don't have a track record.
You can therefore only make a fair comparison using returns over the past year, as I have done below, but you should remember returns could look a lot different over say a 10-year period.
It is also difficult to compare returns, as different products have different compositions, so you’re never quite comparing apples with apples.
Nonetheless, I believe there’s some value in looking at the extent to which returns may differ and how various fee structures affect your return.
So I have done what I have been advised not to do, and created ETF, ETF fund and sector fund portfolios that somewhat reflect the composition of SuperLife and ASB growth funds, to do a comparison. I haven’t included Simplicity as its investment funds have only been available to the public since April.
| Returns on a $20,000 investment, after fees and tax at highest rate, after 1 year (as at May 31, assuming distributions are reinvested) | |||||
| ASB Growth Investment Fund |
$4000 invested in each of the following funds: NZ Shares, Aus Shares, Overseas Shares, Emerging Markets, Overseas Bonds |
$4000 invested in each of the following ETF funds: NZ Top 50, Aus Top 20, Total World, Emerging Markets, Global Bond |
$4000 invested in each of the following ETFs: NZ Top 50, Aus Top 20, Total World, Emerging Markets, Global Bond |
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| Assuming you invest in the fund(s) for the first time |
Contribution fee: $19,910 x 8.71% = $1,734 |
Administration fee: $12 $19,988 x 9.99% = $1,997
|
Administration fee: $12 (spread across funds) - NZ Shares: $3,998 x 5.40% - Aus Shares: $3,998 x 9.92% - Overseas Shares: $3,998 x 10.21% - Emerging Markets: $3,998 x 15.15% - Overseas Bonds: $3,998 x 3.89% = $1,782 |
Administration fee: $12 (spread across funds) - NZ Top 50: $3,998 x 6.01% - Aus Top 20: $3,998 x 5.52% - Total World: $3,998 x 10.09% - Emerging Markets: $3,998 x 16.53% - Global Bonds: $3,998 x 3.91% = $1,682 |
Application fee: $30 x 5 = $150 - NZ Top 50: $3,970 x 5.49% - Aus Top 20: $3,970 x 6.02% - Total World: $3,970 x 9.71% - Emerging Markets: $3970 x 15.55% - Global Bonds: $3,970 x 3.94% = $1,616 |
| Assuming you already have $20,000 invested in the fund(s) |
$20,000 x 8.71% = $1,742 |
- NZ Top 50: $4,000 x 5.49% - Aus Top 20: $4,000 x 6.02% - Total World: $4,000 x 9.71% - Emerging Markets: $4000 x 15.55% - Global Bonds: $4,000 x 3.94% = $1,628 |
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Smartshares ETFs vs SuperLife ETF funds
As you will see, there is around a $60 difference between the returns you would have received over the past year if you bought units in Smartshares ETFs yourself, compared to if you did so through investing in corresponding SuperLife funds.
NZX Head of Funds Management Aaron Jenkins says there will always been a minute difference because SuperLife’s ETF funds include a bit of cash, as there is a delay between people investing in the funds, and SuperLife buying the ETFs.
Furthermore, the fees differ a little due to the buying power SuperLife has as it buys ETF units on behalf of a number of investors.
The other difference between investing in Smartshares ETFs directly or through SuperLife is that you have to pay brokerage fees if you’re trading ETF units on the stock exchange yourself. ANZ and ASB Securities provide online brokerage services, with the latter being cheaper.
Therefore, investing in ETFs through SuperLife may be better for a more active investor. However Jenkins says people investing in ETFs are generally playing a long game, so aren't too fixated on doing a lot of trading.
Throwing SuperLife’s sector funds into the mix, Jenkins says the appeal with these is that they’re a simplified version of ETFs. So this might be the way to go for someone who wants to invest in a range of New Zealand shares, but doesn’t know whether it’s best to invest in a NZ Top 10 or Top 50 ETF, for example.
The fees across Smartshares ETFs, SuperLife ETF funds and SuperLife sector funds are fairly similar.
ASB vs Simplicity vs SuperLife investment funds
As with the three investment options discussed above, the returns you can expect to receive from investment funds that largely track the market, should theoretically be quite similar.
The make-up of their portfolios are fairly standardised across different risk profiles and therefore one is broadly expected to be as affected as another when the market shifts.
While the annual returns (after fees and tax) of ASB’s investment funds over the last three years range from 4.18% to 8.40%, SuperLife’s range from 4.02% to 10.48%.
Differences are partially derived from fees. ASB’s range from 0.97% to 1.25% p.a of the value of your investment, while those for SuperLife’s investment funds range from $12 + 0.45% - 0.59%.
Simplicity has marketed itself as having the lowest fees in the market, setting a standard annual fee across all its funds of $30 + 0.31% of the value of your investment.
Furthermore, being a not for profit, Simplicity has vowed to pass on the gains it gets through economies of scale to its investors, by dropping fees when it can.
Its Managing Director Sam Stubbs says since launching in September last year, $150 million has been invested in Simplicity’s KiwiSaver and investment funds. The organisation will break even once funds under management hit $400 million.
While this innovative business model is appealing, I would be interested to see what Simplicity’s returns look like in a few years’ time.
Finally, there is an argument that you’re better off investing in an established institution with backing from a larger parent company like the NZX or CBA. However Stubbs says all the money you invest through Simplicity is held by the Public Trust, so will be protected if Simplicity goes belly up.
Final two cents
I have only brushed the surface of this topic, but trust this article has given you an idea around what's out there and how various products differ.
While I have drawn my conclusions having studied product disclosure statements and talked to the NZX's Head of Funds Management Aaron Jenkins, Smartshares Product Manager Dean Anderson, Simplicity Managing Director Sam Stubbs, Simplicity Head of Operations and Compliance Craig Simpson, ASB spokespeople, and financial columnist Mary Holm, among a few other experts, please remember I am a financial journalist, not a financial adviser.
20 Comments
Thanks for posting. The platform's website is rather weak about how it works and why it is good for you. Not really sure how it benefits the investor. Realistically, if you can't meet the minimum to save for a Smartshares ETF, you probably shouldn't be investing anyway.
InvestNow is also another platform. Only fund manager fees are charged, with no brokerage/entry/exit fees. Entry into the funds is $250. They provide various Fisher Funds, Salt Funds Management, AMP Capital, Mint, Devon and Harbour managed funds. They also currently offer two Vanguard international shares (excluding Aussie) index funds, and are looking at offering Smartshares ETFs.
Disclaimer: I am not affiliated with InvestNow.
The question is whether they can sit tight and ride out the wave when the market turns and the values of their investments fall, while their mates with managed funds possibly suffer softer blows.
In the small NZ market, an under-mentioned problem with both active and index funds is the tendency of managers to close funds with little warning. This usually happens precisely when the fund is not doing well so the question of which investors "can sit tight" becomes moot. They all get cashed out at a low price and the manager erases a blot. I can think of one example among the above providers but have no idea if the others have been, or will be, better in the long haul. Fund life expectancy stats, per provider, would be interesting :)
Long-time index investor here. Have invested through Smartshares, Superlife, Simplicity, InvestNow and directly offshore with Vanguard (not recommended for those who can't stomach exchange rate risk)
Over the last few years, this area has got more competitive and more global. If you want a one stop shop and have $10k, pick the Simplicity fund of choice then keep paying in regularly (no minimum once you have $10k). Less than this then buy Vanguard global fund via InvestNow.
J.C. Simplicity is not only related to KiwiSaver: here is the Simplicity Investment Funds link - https://simplicityfunds.kiwi/
Another great summary of passive investing options here: https://thesmartandlazy.com/2017/06/13/smartshares-superlife-simplicity…
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