Article written by Jason Choy, InvestNow Senior Portfolio Manager – 21st November 2024

No doubt you will be well across the Du Val saga that has played out in the media over the past months. Many mum and dad investors and would-be first home buyers are essentially back at square one, with only slim hopes of recovering investments of reportedly up to $1 million.

Without laying any blame on investors, there are some key lessons that can be learned, particularly in how the InvestNow Investment Principles could have helped avoid this situation.

Our other big takeaway is how a very misleading and potentially dangerous label has allowed this to happen.

Investments like the Du Val fund are known as “wholesale investments,” which means they’re for “wholesale investors”.

The problem is, a lot of people don’t fully understand what that means. In this case, the fund was clearly targeted at retail mum and dad investors – more detail on that below.

We believe there is a strong case for changing the name of “wholesale investments” to “unregulated investments”.

A name change would ensure that everyday investors are better informed about what the investment actually is, rather than enabling it to hide behind a meaningless characterisation (see our May 22 article which, coincidentally makes reference to Du Val investments).

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.

Beyond that, there are five key learnings for investors:

There is no specific InvestNow Investment Principle that applies here – it’s just the old adage of something appearing to be too good to be true.

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.

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.

Wholesale investments (or unregulated investments, as we’d like to see them called) like the Du Val fund don’t have the same protections as well-regulated and licensed investment options such as KiwiSaver funds.

This includes the layers of controls and oversight from licenced 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.

This information is provided by InvestNow Saving and Investment Service Limited (“InvestNow”). The information and any opinions in this publication are based on sources that InvestNow believes are reliable and accurate. InvestNow, its directors, officers and employees make no representations or warranties of any kind as to the accuracy or completeness of the information contained in this publication and disclaim liability for any loss, damage, cost or expense that may arise from any reliance on the information or any opinions, conclusions or recommendations contained in it, whether that loss or damage is caused by any fault or negligence on the part of InvestNow, or otherwise, except for any statutory liability which cannot be excluded. All opinions and market commentary reflect InvestNow’s judgment on the date of this publication and are subject to change without notice. This disclaimer extends to any entity that may distribute this publication. The information in this publication is not intended to be financial advice for the purposes of the Financial Markets Conduct Act 2013, as amended by the Financial Services Legislation Amendment Act 2019. In particular, in preparing this document, InvestNow did not take into account the investment objectives, financial situation and particular needs of any particular person. Professional investment advice from an appropriately qualified adviser should be taken before making any investment.