by Grant Hill
Offering two mortgage funds structured to meet different investor needs and marginal tax rates was the primary reason behind the launch of the BNZ Mortgage Distribution Fund. The fund is promoted side-by-side with the existing BNZ Mortgage Investment Fund.
Regardless of an investor's objective, whether it is to earn extra income or save for a specific goal, or whether their marginal tax rate is 19.5%, 33% or 39%, one of the BNZ mortgage funds will ideally meet their requirements.
This is unique in New Zealand as other fund managers promoting mortgage funds do not cater for the full range of mortgage fund investors' needs.
The new BNZ Mortgage Distribution Fund is a group investment fund and distributes income on a quarterly basis. This structure is ideal for investors seeking competitive income from their investment. It is also ideal for investors on a marginal tax rate of 19.5% as income distributions are taxed at their marginal tax rate - much the same as a bank term deposit.
Many retirees fit into both these categories.
For investors saving for a specific goal who are on a tax rate
of 19.5% they can reinvest the quarterly income to buy more units
thereby increasing the value of their investment.
The BNZ Mortgage Investment Fund is a unit trust and as such income
is taxed at 33% within the fund. The fund accumulates all income
and returns are reflected by daily increases in the unit price.
This structure is ideal for investors who are on a marginal tax rate of 33% or 39% and are saving or investing for a specific goal.
Because the fund does not distribute income, investors on a 39% rate tax enjoy a 6% tax cushion on returns.
The following shows the decision making process investors should go through when deciding between the two funds.
The objective of both funds is to provide investment returns that outperform standard bank term deposits over a 2-year period - the recommended minimum investment period.
The BNZ Mortgage Investment Fund has a long track record of delivering to this objective as the following graph illustrates. It shows the 2-year rolling annualised return of a term deposit against the 2-year rolling annualised return of the fund.
The level of net out performance (i.e. after fees and taxes) has always been at least 0.25% per annum or 0.37% if expressed as a gross return.
Investors can enjoy higher returns without too much additional
risk. As the BNZ Mortgage Investment Fund now obtains its exposure
to mortgages by buying units in the BNZ Mortgage Distribution
Fund, this effectively means only one pool of mortgage assets
is managed. Diversification is a key method of minimising risk
and this is achieved by approximately 1,300 individual mortgages
making up the assets.
Very strict lending and credit criteria are applied to all mortgage lending and the focus is primarily on lending to the lower risk residential mortgage sector.
New Zealanders are inherently risk adverse by nature with $47 billion invested in term deposit and cash investments.
Mortgage funds are an ideal alternative
for a large number of these investors and with only $2.5 billion
currently invested in mortgage funds the current strong inflows
into this sector look set to continue.
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