KiwiSaver just got a lot stupider

There is a certain class of tinfoil-hat wearing misfits who refuse to sign up for KiwiSaver, because they’re worried the Government will mess with their retirement funds.

Of all the reasons to dislike the scheme – and hoo boy, there are plenty – I’ve never wasted any column inches on this kind of paranoia.

Until this week, that is. The Greens have announced that default KiwiSaver providers will be forced to exclude fossil fuels from 2021.

This was trumpeted as a major win in the fight against climate change, with much selfcongratulation about creating a better future, etc.

But most media reports missed the real news: for the first time, the Government will dictate what you can and can’t invest in.

Our leaders know what’s best. Right?

As Commerce Minister Kris Faafoi explained, investing in a sector that might not have a long-term future was ‘‘not necessarily the wisest investment decision to make’’.

Uh, thanks for the tip minister, but … that’s not how markets work! That’s not how any of this works!

Imagine thinking you have a unique insight that fossil fuels will become obsolete; that professional investors are somehow not aware of this obvious fact; that every tiny scrap of news and forecasted future returns isn’t already priced into the market within milliseconds. Now imagine you’ve somehow managed to become the commerce minister of an entire country.

Are you worried yet? Well, let’s get a little stupider.

The whole point of this visionary move was to hit the oil companies and other baddies where it hurts.

So: what happens when the KiwiSaver default funds have to sell up? There’ll be fractionally less demand for those stocks, which means the price goes down... for about five seconds, that is, until literally any other investor who is less ‘ethical’ (read: naive) swoops in, enjoys the slightly higher yield, and resets the price to equilibrium.

Seriously, any teenager taking Econ 101 could have pointed out the gigantic, gaping flaw in the plan.

For the sake of the slow people in the Beehive: when you buy shares in, say, ExxonMobil, your money doesn’t fund the company’s plan for fracking cuddly polar bears or whatever. It goes to a random investor cashing out their own stake. ExxonMobil’s activities are entirely unaffected, and so is its profit margin.

If the divestment campaign somehow succeeded in permanently depressing share prices, it would make it harder to raise new capital. But companies like ExxonMobil, which keep ~US$3 billion of petty cash on hand at any given moment, are probably going to be OK.

At this point, I should declare my own biases: I’m on the Greens’ side. I want the same outcomes they do. I just wish they didn’t wear their economic illiteracy like a badge of pride.

If we really want to punish companies for bad behaviour – and I strongly agree we should – there are two ways to go about it.

The first is to consume less of the harmful products – to stop buying oil, or plastic, or the shrink-wrapped flesh of factoryfarmed animals.

The other way is to regulate corporate misbehaviour through careful policy-making: like the incredibly brave move to ban plastic bags and straws, which will wipe out at least 0.2 per cent of waste, for the small price of inconveniencing millions and probably increasing carbon emissions.

This latest ‘victory’ is more of the same feel-good nonsense. It looks great on the surface, while achieving nothing – except a modest transfer of wealth from KiwiSavers to less scrupulous investors.

There’s only one free lunch in the world of investing, and that’s diversification. The moment you start creating clever exceptions, you lose. And if your fund manager is forced to waste resources screening out arbitrary ‘sin’ stocks, guess who pays the expense bill?

Nearly 700,000 people who haven’t moved from the default funds are about to enjoy the fruits of the Government’s meddling.

Of course, if you haven’t bothered to make a conscious decision about which fund to be in, that should be the least of your concerns.

Thanks for the tip minister, but … that’s not how markets work!

Got a burning money question? Email Budget Buster at richard. meadows@thedeepdish.org, or hit him up on Facebook.