By Jason Choy
Of all the tragedies in the fallout from the collapse of Du Val property group, perhaps the saddest is hearing about the significant losses of everyday Kiwis.
Many mum and dad investors and would-be first home buyers are essentially back at square one, with only slim hopes of recovering individual investments of reportedly up to $1 million.
While all investments involve some level of risk, there’s a massive gulf between well-diversified investments managed by licenced entities and unregulated investment products pushed via misleading practices, which appears to be the case with Du Val.
Without laying any blame on investors, there are some key lessons that can be learned.
1. Too good to be true investments probably are
Du Val advertised stable returns of 10% per annum for investors in their mortgage fund, comparing it favourably to the security of bank term deposits.
But investments that offer higher returns typically do so because there is higher risk involved.
Even if investors missed the Financial Markets Authority (FMA) order against Du Val for misleading customers on the inherent risk of its fund, alarm bells should’ve been ringing when a high return was advertised as a low-risk investment.
The Du Val fund was marketed as early as 2021, when interest rates for savings accounts were close to zero percent. In that environment, an investment offering a “stable” 10% return should immediately stand out as being risky.
Don’t get sucked in by big numbers. If you get promised a massive return, that should warrant more scrutiny, not less.
2. Understand the risks involved
When considering any investment, it’s important to understand how it generates returns and the exact risks involved in doing so.
There’s a big difference between market risk – the macro-level risks inherent in all investments that are largely unavoidable, and investment-specific risk – the things that impact a specific investment or sector only.
The Du Val post-mortem is clear that many investors were not wary enough of these investment-specific risks; specifically, their exposure to only a handful of New Zealand building projects, overseen by a small team with questionable (at best) management practices.
If you don’t fully understand the risks involved, or if you’re not sure, don’t make the leap.
3. The importance of diversification
The more money you put into one single investment, the more you risk losing.
Du Val had minimum investments of at least $250,000, with many investors putting in much more. Exposing so much of your wealth to the success or otherwise of a single investment is very risky.
Diversification is a key investment principle: by spreading your eggs across multiple baskets you are less likely to lose it all, and more likely to get a stable return.
4. The risks of unregulated investments
As a wholesale investment offer, the Du Val fund was an unregulated investment that doesn’t have the same protections afforded to regulated products such as KiwiSaver funds.
This includes the layers of controls and oversight from licensed fund managers, supervisors and the FMA, which provide critical investor protection and help to resolve issues if they do arise.
None of these protections have been available to Du Val investors because of the nature of the investment.
Only “wholesale investors” are supposed to be able to invest into unregulated products. The idea is, they’re for sophisticated, experienced investors that have the knowledge and expertise to properly assess their merits.
However, in Du Val’s case, because investors can self-certify as a “wholesale investor”, it was offered as a back door for everyday Kiwis to take risks they couldn’t be expected to appreciate.
Given those risks, there is a strong case for changing the name of “wholesale investments” to “unregulated investments”.
A name change would ensure everyday investors are better informed about what the investment actually is, rather than enabling it to hide behind a meaningless characterisation.
5. Invest according to your investment objectives and risk tolerance
At InvestNow, we believe the biggest risk for investors, and one many lose sight of, is the risk of ultimately not achieving their financial goals.
In this case, many investors had the goal of buying a house. However, with properties still in construction, they were convinced to put their deposits into the Du Val mortgage fund until homes were built.
So instead of investing in a property, they bought into a fund targeting capital growth by taking on substantial risk.
This is miles away from what those investors actually wanted.
It’s important to take the time to think about what you want from your investment, and how much risk you can afford to take on. For example, can you really risk losing a chunk (or more) of your home deposit? Probably not.
Keeping your investment objective front of mind helps to ensure that any investment you do make is aligned with your ultimate goals.
*Jason Choy is Senior Portfolio Manager at New Zealand investment platform InvestNow – a company of Apex Group.
