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There's more to equity management than just active or passive08

TeNZ clearly split the options for equity investing in two last year. The choices being either go passive or go active. Yet an in-between option has been overlooked.

Tuesday, September 2nd 1997, 12:00AM

by Philip Macalister

One option for share owners which has been lost in the active versus passive management debate is the in-between option.
That is the share services which are offered by a number of the sharebroking firms and up-market advisory firm New Zealand Assets Management (NZAM).
These services allow investors to retain ownership of their shares, avoid the dreaded capital gains tax and have a passive portfolio which can absorb some changes without being tainted, and therefore hopefully outperform any given benchmark.

Sharebroking firm J B Were and Co were one of the first to offer a service with its Portfolio Investment Plans Service (PIPS), while NZAM began looking at the idea back in 1994 in response to New Zealand’s capital gains tax regime.
There are differences between each of these services in the areas of fees and share ownership, yet they set out to achieve the same thing. That is an efficient, low cost way to owns shares, make some changes to the portfolio yet avoid capital gains tax.
None of the portfolios offered have much resemblance to the benchmark indices, rather they are based on the research and views of the managers on various stocks.
“The secret to good equity investing is not what you own, but what you don’t own,” NZAM director Greg Jones says.
The share service portfolio allows an investor to invest in equities on a passive basis, but not be restricted to a portfolio which mimics an arbitrary index.
With NZAM’s New Zealand Share Service investors buy a portfolio of stocks that are recommended by fund managers Coronet Asset Management. Coronet manage this portfolio to a specific mandate but the scrip is held in trust with Trustees Executors.
The service is a quasi-managed fund approach, particularly on the fee side where investors pay an annual fee of 1.4 per cent, plus GST, for the investment decision making, administration and custodial services, plus an establishment fee of 1 per cent charged on entry. PIPS varies in that investors retain ownership of the shares, and the only fees levied are the standard sharebroking transaction fee of between 1 per cent and 2 per cent depending on the size of the deal.
J B Were manager private stockbroking Guy Hedley says the service is a way for the company to bundle up and sell its research to smaller clients.
Both companies are targeting portfolios which are strongly dividend focused, and have some potential for capital gains. Again there are variations as J B Were offer four different portfolios, and each one comes in an eight stock and a 12 stock version.
Amongst its offerings are the New Zealand Income portfolio which is weighted to local shares which have strong yields through sustainable dividend income and the New Zealand Balanced portfolio which is chasing long term growth through investing in a diverse range of New Zealand equities. Besides these, there are also the Australasian income and growth portfolios.
The big question for investors about these methods of investing is how do they stack up tax wise? Is Inland Revenue Department going to class investors in these services as traders and clobber them with capital gains tax?
Both NZAM and J B Were have devoted considerable time and resources to this important question and come up with similar answers.
NZAM director Greg Jones says the company can’t go to the department and get a binding ruling like a fund manager can for a passive fund, as it is offering a service not a product.
He is confident investors are safe in this sort of scheme as long as they play by the rules.
Meanwhile, J B Were have been told in a written opinion from Ernst and Young that the tax status of gains and losses arising from the sale of equities will depend on the tax status of individual investors.
“We consider it is only possible to give general advice on this issue, as the particular facts surrounding each investor will determine their tax status.”
The other big question relating to tax is how many portfolio adjustments can an investor do before IRD classifies them as a trader as that is the point capital gains tax comes in.
This is another of those questions with a grey answer.
No-one can yet clearly define what makes a trader, and all the court rulings to date have done nothing but leave a couple more signposts at the beginning of what is a long journey.
Hedley says there is no magic number of trades which triggers off the crossing from non-trader to trader status.
One of the important elements for an investor to consider is their investment intent at the time of making the decision to either buy or sell a security.
If the intent is to make a capital gain then the investor is likely to get whacked with capital gains tax.
While both services have seen changes to their portfolios in the past several years, neither J B Were, nor NZAM consider they are sufficient to cause concern.
Hedley says, “we won’t change a stock (in the portfolio) unless there is a fundamental change in that company.”
He says the portfolios are monitored by an investment committee, yet investors are not bound to follow any changes recommended by this committee.
The share services are aimed at the professional or sophisticated direct investor, who wants the comfort of professional advice.
“(PIPS) is not designed for the man in the street,” Hedley says.
Investors have to stump up with a minimum of $20,000 for PIPS and $25,000 for the NZAM Share Service to enable them to buy a portfolio which has adequate diversification across stocks.
Hedley says the service is being offered as an alternative to investors, “we are not trying to steal institutions’ business.”
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