• The Listener
  • North & South
  • Noted
  • RNZ
Chris Di Leva. Photo/Supplied

Why we're at a tipping point for term deposits

With no end in sight for low interest rates, many Kiwi investors are turning to managed funds for the first time.

When term deposits were paying 3.5% a year ago, it was just enough to get by, says Chris Di Leva, Multi Asset Specialist at Harbour Asset Management. Fast forward a year and rates of 2.5% before tax are pushing term deposit investors to look elsewhere for better returns.

For many, the answer might be dipping their toes into managed funds for the first time, says Di Leva. Funds spread investors’ risks by holding a range of shares, bonds or other investments under one umbrella.

What can investors expect?

If you’ve never invested in funds it can be hard to know where to start, and it can be a big change in mind-set, says Di Leva.

“At Harbour, each fund contains a wide variety of assets that will behave differently to each other. For example, Amazon in the United States will have very little correlation to a New Zealand company, such as Mainfreight.” In short, funds are designed so when one investment is having a lull, others make up for it.

As well as a team of in-house analysts picking New Zealand investments, Harbour partners with global experts to ensure the best decisions for clients. Local managers know their markets best.

How much will I earn?

According to a study by Credit Suisse, the New Zealand stock market has on average, returned 10% a year since 1900, says Di Leva. That includes many ups and downs, such as the Great Depression of the 1930s and, more recently, the Global Financial Crisis.

The NZX may have returned 15% per year in recent times, but no one expects it to remain this high. Investors need to look through the windscreen and not the rear view mirror.

“It’s more realistic for the next decade to expect around 6-8% a year going forward, which still compares favourably with many bank term deposits,” says Di Leva.

How is Harbour tackling the issue?

Harbour has two funds for investors looking at taking the step from a term deposit to a diversified fund. Both the Harbour Income Fund and Harbour Active Growth Fund are designed to provide stable returns and weather the downturns.

Unlike many fund managers, Harbour has specific targets so that investors know what to expect. The target for the lower risk Income Fund is currently 4.5% per annum, and the Active Growth Fund 6% per annum.

Both funds pay out a regular sum each month. “This gives you the comfort of a relatively stable income,” says Di Leva. “That way you don’t need to worry if this month might be better than next month to make a withdrawal. It’s smoothed over.” A wide spread of investments helps reduce the impact of ups and downs.

Is it risky?

“If you’ve invested in term deposits all your life, it can be a big leap to put your faith in funds,” says Di Leva. More risk-averse investors may prefer to put a toe in the water and invest in the Harbour Income Fund, which typically holds 20-30% in shares. As you become more confident, if you would prefer more growth, you may consider the Harbour Active Growth Fund.