Choosing a Finance Company

Over the past couple of years the finance companies in New Zealand have been taking a higher profile and competing aggressively in the market place for deposits.

This is most evident by a quick flick through any of the major newspapers. They are inundated with advertisements from the 40 or so companies operating in this area.

One of the reasons finance companies have been attractive to investors is that they offer enticing yields.

"These investments have proven attractive to investors in a low interest rate environment where the returns available in the sharemarket are at best mixed," KPMG's Andrew Dinsdale said in the firm's annual Financial Institutions Performance Survey last year.

While some planners shun finance companies outright, others happily use their products.

Grosvenor Financial Services director David Beattie says it is quite appropriate for planners to use finance companies and debentures with their clients.

However, picking the appropriate investment can be difficult because of the huge number of offerings in the market.

Grosvenor breaks the market down into four sectors, property and property development, motor vehicle finance, general/small business and personal/hire purchase lending.

Beattie reckons advisers should use a spread of companies operating in different sectors.

Grosvenor's model debenture portfolios have a reasonable spread and can get up to 10 different holdings. However, to have that many holdings requires a reasonable sum of money.

For a $50,000 portfolio Beattie suggests about four holdings.

He says debentures should be used for short-term reasons as opposed to part of a long-term investment strategy.

Grosvenor also recommends that holdings have no more than a two-year maturity.

The reasoning behind this suggestion is to counter any uncertainty. Because many of these companies are small and exposed to specific sectors of the economy it is necessary to make sure an investor isn't stuck in an investment if things go wrong.

He says it would be very difficult (and expensive) to get out of a five year debenture early.

The main reason advisers should consider using debentures is to enhance the yield on investments over what they can get with Government bonds.

Beattie says although the investor is taking on extra credit risk this is "quite acceptable."

Beattie says many advisers are not particularly good at assessing credit risk and he suggests that instead of just using the local finance company (or the one with the best sales person) advisers should seek advice to find the issues that offer the best value.

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