A couple of months ago, I wrote a 14 part investing for beginners series. I’m a bit biased, but I think it’s a great guide for anyone thinking about investing in the stock market, or someone just wanting to learn about investing.
If you are new to investing I encourage you start with that series.
Now that you are up to speed with all the investing terminology, risks, traps, tactics and strategies you are ready to start investing. Investing is something that you should be comfortable with before getting started. Please don’t invest in something that you don’t know what it is.
So we now have this background knowledge but we want to get started.
Index funds are a great place to start for beginners. Heck, even more experienced investors will find they are better off in index funds thanks to lower costs and often better long term returns. We can’t really control returns, but we can control costs. Low cost index funds can save hundreds of thousands of dollars over the long term.
In New Zealand we have 5 main companies that provide a platform for the purchase of 180 low cost index/managed funds. How is someone supposed to pick from so many options?
I used to bury my head in the sand when it came to investing because it seemed there were too many options that I stopped trying. It is paralysis by analysis. Well, today I am here to help make things easier. I would hate for you to steer clear of investing because it seemed too difficult. It really isn’t once you get started, and the long term benefits can help set you up for life. Index funds are a big part in my path towards financial independence.
Let’s take a look at the main index fund providers in New Zealand and how they compare.
Index fund providers
SHARESIES - The newest of the five fund providers. Sharesies target audience appears to be young adults. They have an easy to use website and app, with easy to understand language and explanations. Great for new investors who would otherwise not be interested in investing.
What is not great for new investors is their fee structure. They charge an annual administration fee of $18 if you have less than $3,000 invested, and $30 if you have more than $3,000 invested. Flat fee structures tend to be no good for people with low investment amounts, such as the beginners they are targeting. For example, if you have $100 invested, then 18% ($18) of that will go towards administration fees alone. If you have $3,000 invested then 1% ($30) will go towards administration fees. Better, but still not great. With passive index funds, you should be paying no more than 0.7%. Bear in mind this doesn’t even include management fees either.
It’s not all bad though. As mentioned it is easy to use and understand. There are 13 funds. Not too many to overwhelm a new investor, but enough to build a well diversified investment portfolio of bonds, property, and local and international stocks. 2 of the funds are actively managed (higher management fees). These are socially responsible global equity managed funds invested through a company called Pathfinder. There is also an AMP global passive index fund (minus tobacco). The remaining 10 funds are Smartshare issued passive index funds.
Note that these Smartshare funds are Listed PIE funds. This means that even if your PIR tax rate is less than 28%, you will still be taxed on all income at 28%. If your annual income is less than $48,000, this means you will need to actively claim a refund for the difference at tax time. Most other funds are multi-sector PIE’s which means you are taxed at your PIE rate, so no need to file a tax refund.
Their globally invested Smartshare funds are not hedged against the dollar, and the AMP global fund is 69% hedged. If a fund is not hedged, that means it is exposed to the variations of international currencies in relation to the New Zealand dollar. For a long term investor this is not an issue. A short term investor, this can pose some risk.
As a Sharesies investor you won’t pay anything to join, buy or sell so that’s a positive. You can also invest with as little as $1, and make further monthly contributions from as little as $1. With the exception of their Pathfinder socially responsible funds and AMP global fund. Those three funds incur buy and sell costs.
SUPERLIFE - Just like Sharesies, there is no minimum to start, and no entry costs. Great for new investors with not a lot of money looking to get started. Superlife also charges an annual administation fee, which as explained above is not great for low value investors. Suprerlife’s annual administration fee at $12 is much less than Sharesies. There are also no charges to buy and sell shares.
Superlife have a massive range of funds. 42 in fact. Plenty to cover all asset classes (cash, bonds, property, resources and stocks), and countries. Among the funds are all 23 Smartshare index funds. In addition, there are several low cost funds that invest in assets according to your age and/or risk levels.
They also have a neat auto rebalance option. So that if your investment portfolio goes too far above or below your desired allocation, then the funds will automatically rebalance to your original levels. This ensures you are never taking on more (or less) risk than you intended.
Another difference from Sharesies are that Superlife have a hedged global equity funds available.
There is also a socially responsible fund available.
Superlife funds are multi-sector PIE’s.
INVESTNOW - Like Sharesies and Superlife there are no buy and sell costs, as well as no start up costs. Investnow doesn’t charge an annual administration fee though. It does require a higher minimum to get started though. A minimum of $250 is needed for any lump sum, and a minimum of $50 per month for regular investors.
Investnow have a huge range of funds. 92 in total. Many of them I won’t discuss, as they are high cost actively managed funds. The aim of this series is to only investigate the best low cost, passive index funds. You will have no problem with Investnow finding a low cost diversified portfolio.
One of the biggest advantages is their Vanguard global fund. It provides direct access to one of the most recognised brands in the world for a low management fee of just 0.2%. The Vanguard shares select exclusions global index fund. This fund invests in over 1500 companies in 20 developed nations, excluding Australia and tobacco and weapon companies. The only downside is you will be responsible for your own tax returns, since this is not a PIE fund. These costs will be on top of the 0.2% management fee. There are also 0.07% brokerage costs for buying and selling. Even still, this fund represents good value for money.
Investnow have socially responsible funds, including the Vanguard funds. There are also options to buy hedged or unhedged funds.
SMARTSHARES - A lot has been said of the Smartshare funds already, as Sharesies, Superlife and Investnow all sell Smartshare funds. There are 23 in total across all asset classes and industries. There are slight differences in the fee structure though.
Smartshares does not have an annual administration fee, so that is good for investors with not a lot of money to invest. Take note though, that Smartshares do have minimum entry points. $500 to get started. $250 for any future lump sums. $50 per month for regular investors.
Smartshares, unlike the other providers, also charge an exit fee. Because Smartshares is just an ETF issuer and not a fund manager, you need to sell your own shares through a qualified brokerage. ASB and First NZ Capital Securities Ltd are two firms that offer this service. ASB charge $15 for trades up to $1,000. $30 on trades between $1,000 and $10,000. 0.3% on trades above $10,000. If you are to use Smartshares, its important that you set up a brokerage account so that you are all ready set up for when you need to sell.
Another cost of Smartshares that you need to take in to consideration is a one off $30 start up cost when you purchase your first index fund. All subsequent funds thereafter have no cost of entry.
Smartshares do not have a socially responsible fund, so if you are that way inclined you will need to look elsewhere.
Another couple of disadvantages are Smarthshare global funds don’t tend to hedge against international currencies either. All funds are also listed PIE’s.
Smartshares processing of your investments is so painfully slow. Their direct debit run is on the 20th of the month. So if you invest some money on the 21st of April, your money will not be collected until the 20th of May. Units are then purchased at the end of the month price, and allocated to your investments around the 3rd business day of the following month. The 3rd of June in this example. That is a delay of up to 42 days which is not great for price certainty. I don’t recommend trying to time the market, but if you are wanting to take advantage of what you think are cheap shares, by the time your money is invested it may be too late. Even if you purchase them on the 20th of the month, that is still a 13 day delay.
We will end on what I think is a positive note. Any company (all of them except Simplicity) that invests in Smartshare funds has access to some funds that use a maximum investment per company. This a capitalisation weighted maximum. An example, is the NZ top 50 fund. Smartshares set a cap of 5% so that any one company in the fund does not represent more than 5% of the fund. Whereas other funds, such as Simplicity and AMP don’t set this cap.
This may not be as important as fees, but is is still an important factor worth consideration. If you want a more diversified fund, with greater potential for growth (and risk), then these indexes are the way to go. Not only is the fund more evenly distributed, but the smaller companies which have more potential for growth (and loss) than the bigger companies, get a bigger representation.
Funds that don’t set a cap can be too heavily invested just a few companies, particularly in a market as small as New Zealand. An example is the Smartshares NZ top 50 fund has just 46% invested in the top 10 companies. Simplicity has 56%. That is over half the fund in just 10 companies, which limits the diversification. Historically, smaller companies tend to offer better value for money and growth than bigger companies. Conversely, they are also more likely to lose money, so it is a risk/reward decision.
SIMPLICITY - Like Sharesies and Superlife, Simplicity also charge an annual administration fee. Theirs is $30 which is no good for investors with lower investment values. At a range of 0.1% to 0.31% they do have the lowest cost range of funds though. At what point do the low management fees make up for the annual admin fee? We will find out later in this blog series.
Simplicity requires a minimum deposit of $5,000 to get started. Once started though, there is no one-off or monthly minimum limits. There are also no set up costs involved.
Other benefits are that their funds are multi-rate PIE’s. There are no trading (buy and sell) costs. Their funds are socially responsible. And their international funds are hedged against international currencies.
Simplicity have the least amount of funds, but they are quite well diversified. They have three managed funds (conservative, balanced and growth) that suit your tolerance for risk. Note that the growth fund currently has less than 80% of its portfolio invested in growth assets. If you want something a bit more aggressive, then Simplicity is not for you. The other two funds are allocation specific funds. One that tracks the NZ Top 50 shares. The other that invests in a mix of local government and corporate bonds.
As mentioned above, Simplicity funds such as the NZ share fund do not put a cap on any one company as to how big a proportion that company takes up in the fund. Whether you think that is important is entirely your decision.
Simplicity funds are a bit less passive than the other companies. The managed funds are as the name implies managed. So, they invest in companies that they see fit. The growth fund does have 69% currently invested in Vanguard stock and bond index funds, so their individual stock selections do only make up a small number. It is still fairly passive, but not entirely.
One thing I dislike about Simplicity is the fact that they are slightly active in their investment decisions. The Managing Director Sam Stubbs is quite outspoken on certain issues such as ethical investing and gender equality in the workplace. Of course these are great ideals to have, but by excluding certain companies that don’t meet up to his social expectations, the returns on their funds may under perform other similar funds on offer by other companies.
The purpose of low cost index investing should be to perform as well as the market. As soon as someone starts tinkering around the edges, performances suffer, making the lower cost not worthwhile.
Each company has such different methods of charging customers it’s no wonder it is confusing for so many people.
You need to look out for:
Annual administration costs ($ flat amount)
Management fees (% of funds invested)
Start up costs
Buying and selling costs
What is important is the total costs. It’s all well and good to have the lowest management fees, but you need to make sure that high admin fees don’t offset that advantage.
The rest of this series will focus on 10 of the most common funds across all companies and compare them on a cost basis on different investment levels of $100, $1,000, $10,000 and $100,000. You will then see which fee structure is better for lower value investors, and which structure is best for higher values.
We will be looking at:
NZ Top 50 funds
Australian top 20
US top 500
Australasian Property and Australian Resources
NZ Mid Cap
This exercise will purely be looking at investments on a cost basis. We know how important low costs can be over the long term, but remember it isn’t the only consideration.
The most important consideration and first criteria is finding funds that meet your investment strategy and objectives. It is all very well to find a low cost fund, but it may not meet your investment portfolio strategy.
Once you have found a fund that meets your investment objectives, then you can compare fees and all the other features of funds discussed today.
I place a high importance on fees, easy tax reporting and diversification. So number of funds available and maximum cap weighted indexes are important to me. Whereas, someone else may put a high importance on ease of use and socially responsible. So, fewer funds with an easy to use platform may be more important.
The fund providers are always making changes to their funds on offer and pricing so it pays to keep an eye out for recent changes that may benefit (or hinder) you.
There is also no rule about having all your funds with one provider. You may find a good mix of funds by using different providers.
Finally, be careful not to overlap your portfolio too much. It is easy to get carried away and invest in more funds than is necessary. Most of us can have a well diversified portfolio from just 3 funds - World stocks, local stocks, and bonds. For a little more diversification you may like a property, resources, value, or emerging markets fund, but this shouldn’t make a huge percentage of your portfolio. One example of a large overlap is between the world fund and the US500 fund, or the world fund and the Europe fund. You may think you are diversifying your investments, but you may be surprised it is not as diversified as you think. More funds does not necessarily mean more diversification.
Thanks for reading and see you next time for the battle of the NZ Top 50 funds.
The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here