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Sunday Star Times article

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  • Sunday Star Times article

    I know this is a property website, but I wonder if anyone can answer this question:
    The most recent Sunday Star Times article mentioned various investment funds and also mentioned Fisher Funds.
    I am not investment savvy and don't really understand a lot of things. From what i understood of the article, it was saying that at the moment, it makes more sense to invest directly in their managed shares fund, rather than doing it through Kiwisaver (because the managed fund is currently being sold at a discount).
    Can anyone tell me if that is what the article said? I'm jsut wondering becoz my kiwi saver is invested in Fisher Funds (100% shares).

  • #2
    Hi Pants,

    I haven't seen the article, but what it sounds like is a closed-end fund. Managed funds or mutual funds come in two varieties - open-end and closed-end.

    If you buy an open-end fund, you give money to the manager, and they add it to the pool of capital they have already raised. You can ask for it back at any time, and they will sell investments in the fund to give you back your share of the fund (including any profits or losses, obviously). The price of an open-end fund (or NAV, - Net Asset Value ) is calculated daily by the manager based on the value of the investments in that fund.

    A closed-end fund is a little different - you don't buy from the manager, but you buy on the market. The closed part of the name refers to the fact that no new money comes into the fund. The NAV is calculated in the same way as an open-end fund, but like houses, the fund is only worth what someone is willing to pay for it on any given day. I think the article probably referred to the fund being sold at a discount due to the fact that the fund in question is being bought and sold at a price less than the NAV.

    Now, to answer your questions about Kiwisaver - all kiwisaver funds are open end, and this will not be the fund you invested in through kiwisaver.

    Whether it is a good idea to buy closed end funds depends on a few things.

    1) Liquidity - How important is it to you to get your money back on short notice? If there is no-one who wants to buy the fund, you don't have the right to ask the manager to redeem the fund (which you would have in an open-end structure).

    2) Discount to NAV. Closed-end funds often trade at a discount to NAV (think about it like this - why would you pay more than NAV for a closed-end fund?). If the discount to NAV gets too much, the investors in the fund could theoretically ask for a change in management company, or for the fund to be wound up and capital returned to investors (in reality this very rarely or never happens). In any case, managers of funds get nervous when their closed-end funds trade at a big discount to NAV, it can imply that the market thinks there has been fraud, or that activist investors could come in and ask for a wind up of the fund, removing their nice stream of management fees. However, if the discount is large enough, you are effectively buying the underlying investments at a discount to their real value.

    So, with these negatives, why do closed-end funds get created? Basically because it represents a stable stream of fee income to fund managers, as investors can't ask for their money back. As an open-end fund manager, your investors can ask for their money back as a result of bad performance, and your business can evaporate overnight. Investments in less liquid assets (such as property) can be put into closed-end funds, and with a stable source of capital, managers can look more at the long run in their investment style. REITs are indeed an example of a closed-end fund.

    Finally, with regard to a closed-end fund vs. kiwisaver, first you have to look at your matching funds from the govt and your employer. Theoretically you should always put at least the amount that gets you the maximum matching funds as "free money". Once you have done that, then I would look at other funds, but bear in mind the disadvantages of a closed-end fund - make sure the discount to NAV is worth the potential negatives of what you are buying. Open-end funds are much easier to get into and out of, and for an inexperienced investor, that is one less thing to worry about when investing your hard earned money.


    • #3
      I wouldn't worry if I was you. Every new $1 put in is invested at todays prices so over time the Kiwisaver account will perform.

      Haven't seen the article but can guess the point is KFL can be bought on the sharemarket at a 20%(?) discount to the value of its investments. So it looks cheap.

      By comparison your Kiwisaver account isn't discounted and reflects actual gains/losses.

      I've owned KFL since issue and am looking at a 10% loss over 5 years at todays price. But I'm not worried, it is coming right - was a 40% loss only a few weeks ago.

      Over and above all that, investment funds normally trade at a discount. The reason is the market allows for the managers costs plus the effect of suddenly selling a multi-million portfolio which would depress the portfolio values anyway.

      Edit: Kyoto has already explained this much more eloquently than I.


      • #4
        One thing to remember. Say you buy the excahnge traded fund (ETF) at a 10% discount. You then sell it in 10 years time. If it is still at a 10% discount when you sell it isn't any different* to having bought it direct from the unit trust at market value.

        * someone with an advanced mathmatics degree will probably tell me that I am wrong but you get my point.

        There are arbitrate opportunities as the discount/premium to NTA changes. If the discount moves from 20% to 10%, you have made a 10% gain, ignoring the underlying market movement.