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Leave the Super fund alone

Wednesday, October 22nd 2008, 10:56AM 9 Comments

by Philip Macalister

I’ve held off commenting immediately on National’s plans to invest 40% of the NZ Super Fund into New Zealand assets so the idea can have more thought. At first I thought it was daft, but I wanted to see if there was any merit in it at all. After discussing the idea with others, reading comments and cogitating on it for a while I come to my original observation. It is a daft, or let’s say sub-optimal idea. I know I am not alone in that. There have been a number of other comment pieces such as this one on a Fairfax site called Super Fund Idiocy and even the Herald, which seems like a National Party mouthpiece sometimes, wrote an editorial which was critical of the move. What I don’t get is how a guy who worked for Merrill Lynch, a company which no doubt supports and promotes diversification, can come up with an idea like this? Two of the key issues in this proposal are if National wants to over-ride the Guardians and give them an asset allocation, it’s just a small step to go further and tell them what projects to invest in. No doubt at this stage pork-barrel politics would start with political parties funding pet projects search for more votes rather than returns. Secondly, and more importantly, the fund is being run to generate the best possible long-term returns so money made can be used pay part of the country’s future pension costs. With a sub-optimal asset allocation the decision potentially threatens future super payments. I’m sure National don’t want the electorate to understand this. Stepping back from this one announcement and looking at what National proposes, a couple of things become clear. Superannuation is again a political football and secondly, it seems getting New Zealand and New Zealanders to save wouldn’t be a priority for a National-led government. I had been under the belief that one good thing the Labour administration has done over nine years is sort out the superannuation area; they’ve put certainty into the area and encouraged Kiwis to save. We may not agree with all the things they have implemented, but Finance Minister Michael Cullen has attacked the issue in a staged and logical way and ended up with a pretty reasonable result. There are many things we can be proud of. NZ Superannuation (the state pension) is considered, internationally, a good, simple and fair system. The NZ Super Fund (aka the Cullen Fund) has won plaudits for being a well-constructed sovereign fund, and better than many others around the world, while KiwiSaver is clearly innovative. It may not have won the same level of accolades as the other two bits of the equation, but it looks like it works and the population are embracing it strongly. Along comes National and it proposes some significant changes, which I would suggest are the last thing Kiwis want. Both National and Labour have lost elections on their superannuation policies in the past. Both have acknowledged the lesson, but maybe one hasn’t listened?
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Comments from our readers

On 22 October 2008 at 8:52 pm Red Dog The Pirate Guy said:
A few weeks ago I went to an ABNAMROCraigs seminar.
the presenters from their head office stated that the returns from offshore equities over the last ten years [for NZ based investors]averaged 1.5%.
by contrast they said investments in NZ and Aussie equities for NZ investors were in double figures.
Of course it is determined by relative exchange rates.
How many Asian countries let non-nationals buy land.
Yet NZ is for sale to the highest Buddha.
I think it is a good idea to invest 40% of the superfund in our own country.
The Nats have got nothing else in terms of policy to offer,so why not let them have one good idea.
As for abolishing the Maori seats,if you could get a reasonable % of Maori people to vote,the Nats would never ever get into power.
On 24 October 2008 at 9:51 am Kimble said:
Once again I come to the goodreturns blog and see that reddog is insisting that the best investment strategy is the one that focuses on short term performance. Some things never change.
On 24 October 2008 at 8:19 pm Red Dog The Pirate Guy said:
I conclude that Kimble's strong point at school was not comprehension.
Investors who took the advice of the average sharebroker or financial planner during the heady days of the 1980's sharemarket rage,ended up with a parcel of insolvent. papershufflers,or 20 years on a bottom drawer of still worthless stocks.
I quote from an email I received today from a sharebroker "Yep land has been great in the past 10-15 years.Global shares have been ordinary at best,about 3.5% in NZD terms and minus 5% in USD terms over past ten years,2 crashes in that time."
Now Kimble,pray tell me what has happened to the value of land over that time ?
On 27 October 2008 at 9:52 am Kimble said:
"Now Kimble,pray tell me what has happened to the value of land over that time ?"

Yep, and the value of land will always go up and up and up and up and ...

Hang on, isnt it that sort of "thinking" that has led to the housing market collapse / sub-prime mess / global credit crunch we are experiencing right now?

I suppose the old saying is true, you cant teach an old red dog new tricks.
On 5 November 2008 at 4:35 am Simon said:
Sorry Kimble and Red Dog for the change in direction and back to the topic.

The question of whether National is making a smart move in having a threshold for the super fund at 40% in NZ assets is the question, not whether property or shares are better. This policy needs to be viewed in light of the current economic climate. There is nothing to say that this policy will remain at 40% during good economic weather, which is what we experienced since 1999.

The policy has merit as we currently invest very little in our own country aside from property, which creates a false economy. Most people do not even pay their mortgage to a NZ owned bank so the profits from borrowing aren’t even retained here. If we had an active share market, like Australia, we would not need to have a 40% threshold in the first place. Instead, our companies under-perform from lack of investment and simply become take-over targets for foreigners.

If we could simply back ourselves in the financial markets and end this ridiculous negative gearing of properties, we will not require this policy to come into effect. Directing our super fund into helping NZ companies seems a very sensible move to creating wealth in New Zealand.
On 15 November 2008 at 7:01 pm Jens Meder. said:
Phil, I am surprised about your lack of confidence in having more of the NZSF invested in NZ, when say a milllion of it invested in LOW INTEREST (5%?) rate, needed infrastructure construction with say a half a million labour cost component, would deliver more than twice the taxable income to NZ, than the same million returning a risky 20% from abroad.
Furthermore, when user-, tax-,& ratepayers repay this low interest rate debt, the 1 transaction delivers also the cash flow for our NZ Super, which has to be paid anyhow.
And what about taking over foreign financed mortgages, reducing foreign debt & earning the interest?
The fact, that these investments are expected to be low earners barely above the rate of inflation, does not harm anyone, because, unlike KiwiSavers and other super funds which deliver according to contributions and what the funds earn, the NZSF delivers equally to all, regardless of the different individual contributions, and what the NZSF earns.
While at present the NZSF is meant only to help the sustainability of babyboomer NZ Super, it should be amended into a permanent institution of personal accounts. The advantages and increased fairness of the latter are a different story, but on what practical grounds (apart from being afraid of changing its investment mandate) are you doubtful about invesdtying more of it in NZ?
Arguably, it is the most positive economic proposal by National so far, as on how to counteract the looming recession and budget deficits, and proof of the NZSF as an economic growth engine, much more of which would become visible when the NZSF, allocated to PAs (Personal Accounts), will start delivering what it was designed for to do for the baby boomers, well star delivering for us all NOW, FROM THE 1ST YEAR OF THE NZSF BEING ALLOCATED TO PERSONAL ACCOUNTS
Discussion on the credibility of all this welcome.
On 17 November 2008 at 9:51 am Kimble said:
"The policy has merit as we currently invest very little in our own country aside from property, which creates a false economy."

Why is that? That is what you need to answer before you can have any credible opinion on what the 'solution' might be.

Simply prescribing "more investment" as a cure for under-investment is the sort of rudimentary thinking good politicians should abhor.
On 28 November 2008 at 7:40 pm Jens Meder. said:
Kimble - My own modest prosperity is based on the maximmum rate of savings & investment I managed through reasonably prudent and modest consumption. Would not the same apply to the country as a whole? What other cure can there be for the poverty resulting from under-investment, than more investment? Please don't withhold your insights on that.
Perhaps you could come up with some more to-the-point critical comments on #6?
On 5 December 2008 at 7:36 pm Red Dog The Pirate Guy said:
Kimble asks why we invest very little in our own country aside from property.
We invest a large amount of our wealth in property because we have a taxation structure which encourages it.
We have no land tax, no state property taxes, no capital gains taxes and no exposure to income tax if you structure your affairs correctly,unless you are very clearly a builder/developer/dealer,which applies to minority of those in the property market.
We also have an IRD which was slashed to the bone during the Nats last reign in power,thus meaning a very low chance of an audit of any description.
As for market trends,of course land continues to go up in value over time.
Of course there are periods of correction,which can be lengthy,but unless you have to sell,it is not an issue.
I strongly back the Nats moves to up investment in our own country,and accordingly I congratulate Jens Meder and Simon on their viewpoints.
New Zealand has been more sale to anyone since Muldoon was booted out in 1984.
How many Asian countries are foolish enough to allow non-nationals to own land ?
Commenting is closed

 

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