If you have money in the bank, no doubt you found it hard to get excited about the Reserve Bank interest rate cuts in May and June, accompanied by the following comment in a Reserve Bank statement that left the door open for further cuts on the back of a softening economy: (post publish note, the OCR was indeed cut 0.50% to 1.00% on 7 August)

“Given the weaker global economic outlook and the risk of ongoing subdued domestic growth, a lower OCR may be needed over time to continue to meet our objectives.” [1]

When the official cash rate is cut banks usually respond by passing on reductions to their home loan customers. The problem is, they also reduce what they pay on a range of their savings products, too. For those wanting to generate income from their savings, term deposits with a high street bank may not currently be the most prosperous option.

“The New Zealand Interest rate is at a historic low … If you need to earn more than 3% on your savings in order to survive financially, you will need to be smart about how to save money,” said research and ratings house Canstar. [2]

If you’re looking for a higher return on your investment there are several alternatives available but factors such as your goals, risk tolerance, required yield, quality of assets, duration, liquidity, and total cost to client (TCC) should be considered when constructing an investment base.

An introduction to shares may fill some more conservative investors with a level of trepidation; although some share investments are designed for dividends rather than capital growth, the possibility of secondary market movement could bring fears of unwanted volatility.

In terms of earnings outlooks, Rob Mercer, Forsyth Barr’s head of private wealth research makes a salient point.

“In response to the minimal changes to forecasts over the reporting season, the 2.6 per cent rally in the New Zealand share market [in May] seems difficult to justify,” said Mercer. “We are heading into a low earnings outlook where there is more uncertainty – the market is not pricing either one of those things … The market is definitely overvalued.” [3]

Therefore, the search for consistent yield continues for the retail investor. Fund managers and financial advisers will talk about “relative returns”. A relative return is a measure of the return of an investment portfolio relative to a theoretical reference portfolio or benchmark. However, fund managers can talk all they like about how well they’re doing compared to an index, but if the 90-day bill rate (which is an index that tracks close to OCR[4]) is 1.60%, no one is going to dance for joy because their locked-in term deposits are a percentage or two above that.

There is a saying in finance, especially relevant in a low interest rate environment, that is “you can’t eat relative returns”. Basically, this means that investors ought to be focused on the absolute growth of their money, not on its growth relative to some benchmark.

Whilst rate is important, it should not be at the expense of other sound investment principles (including a proper understanding of risk) and investor goal-related considerations. It’s important to understand how assets are managed, by whom, and whether you can access your funds when you need them. An example of an accessible alternative outside of term deposit and dividend orientated shares is (amongst other assets[5]) mortgage funds.

Pros of mortgage funds:

·        Mortgage funds target capital, with stable, income-based returns from portfolios of loans secured by mortgages

·        Investors usually receive regular income payments

·        Generally offer stable returns

Some points to be aware of:

·        Be wary of funds that allow related-party transactions

·        Avoid those with high loan-to-value ratios and lack of diversity of loans

·        The manager’s experience is crucial.

Tobias Taylor is the CEO of Midlands Funds Management Limited, manager and issuer of the Midlands Mortgage Trust. The PDS for the Midlands Mortgage Trust is available at http://www.midlandsmortgagetrust.co.nz.

This article was written for the Profit https://www.theprofit.co.nz/ Article written 11 July 2019 for August Issue.

[1] https://www.rbnz.govt.nz/monetary-policy/official-cash-rate-decisions

[2] https://www.canstar.co.nz/kiwisaver/surviving-in-a-low-interest-environment/

[3] https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12067173

[4] https://www.rbnz.govt.nz/statistics/key-graphs/key-graph-90-day-rate

[5] https://moneymag.com.au/four-alternatives-to-term-deposits/