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Just the facts please

Friday, January 25th 2008, 2:11PM 6 Comments

by Philip Macalister

My last blog was called PIE are we waiting and you could well ask why are we waiting for the next one! Wait no longer…it’s here. The theme of this one is about the quality of some of the information we see and read. Writing this reminds me of sayings about stones and glasshouses. So before you take umbrage remember I am aware no-one is perfect! What got me going was mainstream media reporting of KiwiSaver fund performance a little while back. One piece where ING got a big swerve for the performance of its funds was atrocious. Firstly the writers of these reports need to be balanced and understand markets and investments. Secondly ING deserve some credit, as they were one of only a few managers who actually – as far as I can see disclosed performance. Unfortunately that ING was followed by another one about overall KiwiSaver fund performance. Secondly I read a speech to a EUFA event where a leader of the financial planning industry made some pretty exaggerated claims such as there could be 50,000 advisers in New Zealand and that people who invested in finance companies have lost "about a billion dollars." Such comments are rubbish and shouldn’t be made. The point of these comments are that it is really important for the record to be set straight and I think that is a thing which falls on all the savings industry. Secondly, and with a little self-interest, we try to cut through the rubbish and get to the facts, however I have to say that is sometimes difficult to do.
« PIE are we waiting?What's happening at MFS? »

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Comments from our readers

On 25 January 2008 at 7:15 pm Michael Donovan said:
As a director of a "Finance Company" I feel very qualified to pass my comments re finance comapnies in NZ, but only to those who are truly interested, and not just wanting to be part of a negative "slanging match..!"

I also continue with my opinion/s on the REAL rate of inflation, but again only to those interested.
It is a rather serious and scary scenario and places most of the financial planners in a precarious situation if you want to know the facts...?

Contact me email Michael Donovan
On 29 January 2008 at 9:32 am Adolf Fiinkensein said:
Would you please explain (with some evidence) why it is you feel the claim that "...people who invested in finance companies have lost “about a billion dollars.” is exaggerated. If you look at Bridgecorp alone and imagine that investors might be lucky to get back 20 cents in the dollar then you are pretty close to have a billion, so to suggest the total might be more than one billion does not seem too much of a stretch. And of course you can't assume there will not be more collapses still to come.
On 29 January 2008 at 9:33 am Adolf Fiinkensein said:
Damnit! Should read 'close to half a billion.'
On 1 February 2008 at 5:08 pm admin said:
Hi Adolf
My calculations are that there is around $1.3bill at risk. If the recoveries go well the actual loss of principal will be around $362mill, if all receiverships are on the low side then it is $674m.
Nowhere near what was being said in the speech I refer to.
I haven't included loss of interest in these calculations as I don't think that is a loss of the investors' money.
This ain't too bad compared to losses on the sharemarket and in CDO-type investments.
On 1 February 2008 at 9:16 pm Barrington Smythe said:
I'm not sure where Admin is coming from. It's nonsense to say that the loss of interest in not a loss of investors' money - of course it is.

If these investors had left their cash in the bank, they would have had the benefit of both the interest and the principal.

Now, investors may wait up to two years or more (without receiving any interest) to get back say 50c in the dollar. In those two years the investor has neither interest income nor the benefit of the principal. When the money does finally get returned, it generates half the interest going forward. This is a real loss of money.

Any financial adviser should know that 'losses' in the sharemarket are only losses if investors sell. Investors in equities hopefully understand that prices and dividends can be volatile, but in the long run deliver real returns. Holders of Telecom shares bought at $4.50 or so are probably receiving around 10% p.a. of dividend income and should see the share price increase over time. The short term movement in prices is irrelevant unless you have to sell for some reason, so it's not a loss.

I'm not sure how much was invested in CDO-type investments in NZ, but assuming that you include the ING funds, maybe $1billion. Generator, Hy-Fi and GCN all mature this year and should pay back in full. The ING funds have so far lost 10%-15% or so (after fees) and some of the more recent transactions (PINS/Credit Sail) are capital protected, so make that around $75m of losses. Not really in the same ballpark.

Unfortunately almost all of the people who were herded into debentures believed that they were investing in low risk, secure, Lloyds insured (in some cases) securities. They have no choice about whether or when to sell, but simply have to wait to get back whatever is left and try and pick up the pieces.
On 11 February 2008 at 8:32 pm The lone Ranger said:
Admin is not making much sense.
Investing in the sharemarket is acknowleged as a risk where you may lose your capital.
Those investing in interest bearing investments do not expect to lose their capital.
Barrington Smythe once again provides a common sense approach to matters.
I have printed off a list of ''advisors'' who are listed on the institute of financial advisors as practising in my region.A scrutiny leads me to conclude that 60% of them belong to firms where portfolios containing failed finance companies have been constructed.I cannot give you an opinion on the other 40% as I have not seen any portfolios from them.
I can tell you that having a university degree does not provide any additional assurance for an investor.
How much money has been lost nationally in total dollar terms is an irrelevant point.
When an investor has anywhere from one to six failed finance companies in a portfolio,it is a serious matter.
It is not only the loss of capital they suffer,but the absence of interest income.
I congratulate Chris Lee on his forthright articles.
Commenting is closed



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