Our comprehensive review of Conservative KiwiSaver fund performance to September 2015, identifying who has the best long-term returns

By Craig Simpson

After having dealt with the Greek crisis at the beginning of the quarter we finished in the midst of another one, this time in China.

Instability in the Chinese economy and downward revisions to growth estimates has been a thorn in the side of investors. A massive sell-off on the Chinese stockmarket in the later part of the quarter did nothing to calm nerves either.

In a bid to stop the bleeding, Chinese government officials stepped in to support the market. Many Chinese investors who were advised to leverage up when times were good have now lost their shirts. Goldman Sachs estimates put the cost of the Chinese government intervention at 1.5 trillion Yuan thus far.

JPMorgan's global market strategist said in the company's Q3 market review that the "Chinese slowdown is part of the process of the economy transitioning to a path of slower but more sustainable consumption and service-based growth."

Investors should not be surprised if further downward revisions to Chinese economic growth forecasts are made in the coming few months.

Commodity prices tumbled too as excess supply and a continuing reduction in demand from China meant a new equilibrium level had to be found.

Adding to the uncertainty during the quarter was the US Federal Reserve. Expectations were leaning towards a rate hike. However a deterioration in some of the indicators adopted by the Fed meant the committee took the path of least resistance and held interest rates at their current near zero levels for another few weeks at least. The uncertainty around future movements by the Fed has simply added to the stress some were already feeling.

Not to be left out, bond markets experienced some jitters too. Easy monetary policy conditions has led to a cheap source of funds and increased levels of borrowing. With it investors have been chasing yield, and the threat of two major central banks (US & UK) looking to raise interest rates has created some market stress.

One point bond managers are making is that liquidity in fixed income markets has deteriorated. What this means for investors is that If interest rates rise (bond prices decline) any sudden exodus from bonds within a thinly traded market will more than likely see greater volatility.  The seesaw of values on a daily basis will be of greater concern for those investors with short term time horizons or who require greater levels of capital assurity.

For investors in Conservative KiwiSaver funds the impact of sharemarket losses is reasonably small as in most cases portfolios have less than 30% of their total assets exposed to equities.

Returns for fixed income heavy portfolios will be determined for the most part by the split between global vs domestic assets, and also the split between corporate and government bonds.

Over the past 12-months the general trend has been for sovereign (government) bonds to outperform corporates, and domestic bonds have outperformed offshore equivalents (hedged back to NZ dollars).

Having said this unhedged global government bonds have outperformed both NZ government and corporate bonds by approximately 8%.

Our regular return savings model we use to measure performance is starting to see lower long run returns already, although these are reasonably minor at this stage.

We are not trying to alarm anyone unnecessarily but rather make readers aware that bonds can suffer capital losses, are not totally riskless and investors with larger exposures to bonds could experience some greater than expected variability in returns over coming months.

Specifically looking a the various conservative funds we are seeing the top come off the longer run returns and at this stage this has not has too much of an adverse impact on the overall balance of our regular saver who we model our analysis around.

Some of the drivers behind the drop in performance will be due to a spike in US and European bond yields which drives capital values lower; the sharp decline in the NZ dollar versus it's major trading partners, which has a negative impact on those funds with high degrees of hedging in place; and the decline in global stock markets on the back of the Chinese stock market sell-off and ongoing threat of a Greek default.

Some other factors will be security or sector specific and impact the individual funds uniquely.

Although we have seen chaos and despair offshore, at home things have been trucking along with our local bond and share markets holding their own in local currency terms. These bright points will have helped returns, however in some cases not enough to keep some funds above the line.

Returns from the default funds continue to outperform many of the other conservative funds. In our survey the only conservative fund we would consider to be holding its own against the Default funds is the Kiwi Wealth Conservative Fund.

Kiwi Wealth Conservative fund is also awarded our best in category award for delivering superior long run returns and at the same time delivering short term returns that are at least equal to, or above, the long run return.

Since inception, and on a regular savings basis, the average of the top five Conservative funds (excluding Default funds) has produced compound annual returns of 5.2%. Over the past three years, that return has edged down to an average of 4.1% p.a.

Assuming you had been invested for the period April 2008 to June 2015, the difference between the average return of the top and bottom conservative fund (excluding Default and Cash funds) in dollar terms is approximately $3,900. Including cash funds the difference is a staggering $4,900, or $55 per month since April 2008.

Across other conservative and cash funds a majority have under-performed their longer term average return. The Kiwi Wealth Conservative Fund performance over both the long and short term is the highlight of this group of funds.

The Milford Conservative fund shifted to a more conservative asset allocation during September and we are expecting the performance of the fund will be more in line with the rest of the funds in this category over time. It may take several quarters for the changes to asset allocation and lower fee structure to influence the short and long term performance data.

Here are the full comparisons as at September 30, 2015 for Conservative Funds.
 

Conservative Funds
 
 
 
Cumulative$
contributions
(EE,ER,Govt)
=+Cum net gains
after all tax,fees
Effective*
cum return
=Ending Value
in your account
Effective
last 3yr
return%p.a.
Since April 2008
X
Y
Z
to September 2015
 
 
 
$
%p.a.
$
                 
 Kiwi Wealth Conservative C C C
24,968
8,262
6.1% 33,230 6.2%
ANZ OneAnswer NZ Fixed Interest C C FI
24,968
7,558 5.6% 32,526 3.7%
ANZ OneAnswer Int'l Fixed Interest C C FI
24,968
7,105 5.3% 32,073 4.4%
Lifestages Capital Stable C C  
24,968
5,431 4.0% 30,399 3.9%
AMP Cash C D Ca
24,968
4,884 4.3% 29,852 2.9%
Mercer Cash C D Ca
24,968
4,713
3.4% 29,681 2.8%
Grosvenor Enhanced Income C D C
24,968
4,688 3.3% 29,656 2.7%
Fisher Funds Two Preservation C D Ca
24,968
4,603 3.3% 29,571 1.3%
ASB Cash C D Ca
24,968
4,588 3.3% 29,556 3.1%
Aon Nikko AM Cash C D Ca
24,968
4,506 3.2% 29,474 2.7%
ANZ Default Cash C D Ca
24,968
4,413
3.1% 29,381 2.7%
Staples Rodway Conservative# C D Ca
24,968
4,388 3.1% 29,356 2.9%
ANZ Cash C D Ca
24,968
4,336 3.0% 29,304 2.8%
Westpac Cash C D Ca
24,968
4,306 3.0% 29,274 2.7%
ANZ OneAnswer Cash C D Ca
24,968
4,203 2.9% 29,171 2.6%
Aon ANZ Default Cash C D Ca
24,968
3,607 2.4% 28,575 2.2%
Craigs fixed Interest C D Ca
20,006
3,545 3.5% 23,551 1.6%
---------------                
Column X is interest.co.nz definition, column Y is Sorted's definition, column Z is Morningstar's definition
C = Conservative, D = Defensive, Ca = Cash, FI = Fixed Income

* The Staples Rodway Conservative Fund invests solely into cash and short term deposits and hence why this fund is found performing in line with cash funds in this sector.

For those funds that have not been in existence for over three years their results are shown in the table below.

Conservative Funds      
Cumulative $
contributions
(EE, ER,
Govt)
+ Cum net
gains
after all tax,
fees
Effective
cum
return
= Ending
value
in your
account
Effective
last 3 yr
return %
p.a.
since April 2008 X Y Z
to September 2015      
$
% p.a.
$
       
 
 
 
 
 
Milford Conservative C C M 9,990 2,865 9.2% 12,854
8.0%
BNZ Cash C D Ca 8,487 1,452 3.2% 9,958
n/a
---------------                
Column X is interest.co.nz definition, column Y is Sorted's definition, column Z is Morningstar's definition
C = Conservative, D = Defensive, FI = Fixed Income, M = Moderate, Ca = Cash

In addition, savers interested in risk-protected returns should consider Westpac's capital 'guaranteed' funds.

These funds invest in equities but have a Capital Protection Plan that's designed to give you the opportunity to earn the higher returns normally associated with growth assets without the risk of losing your initial contributed capital (other than through the insolvency of the Capital Protection Provider or a "tax change event"). The goal of generating higher returns is implemented by having as much of the CPP Fund as possible invested in growth assets.

However, the manager is also required to preserve the capital value of the Fund. It does this by reducing the amount invested in growth assets if the value of the assets of the CPP Fund falls below certain predetermined levels. Instead, some (or, if there is a very dramatic fall in the value of the growth assets, all) of the assets of the CPP Fund are placed in a form of deposit with the Capital Protection Provider that is designed to recover part of the value of the assets over time, but does not produce a positive investment return (these are sometimes called zero coupon bonds or deposits).

Westpac has five such plans, all starting at different times:

Capital protected      
Cumulative $
contributions
(EE, ER,
Govt)
+ Cum net gains
after all tax, fees
Effective
cum
return
= Ending value
in your account
Effective
last 3 yr
return
% pa
since April 2008 X Y Z
to September 2015       $ % p.a. $
                 
Westpac CP Plan 1 C A Mi 22,726 11,909 10.1% 34,635 11.8%
Westpac CP Plan 2 C A Mi 19,504 9,030 10.2% 28,534 11.6%
Westpac CP Plan 3 C A Mi 16,176 6,928 11.7% 23,104 11.2%
Westpac CP Plan 4 C A Mi 17,242 5,084 12.5% 17,837
10.6%
Westpac CP Plan 5 C A Mi 9,592 3,047 11.7% 12,639
n/a
---------------                
Column X is interest.co.nz definition, column Y is Sorted's definition, column Z is Morningstar's definition
C = Conservative, A = Aggressive, Mi = Miscellaneous

Don't jump into these capital protected funds unless you understand fully how they work in good times, and bad.

For explanations about how we calculate our 'regular savings returns' and how we classify funds, see here and here.

There are wide variances in returns since April 2008, and even in the past three years, and these should cause investors to review their KiwiSaver accounts especially if their funds are in the bottom third of the table.

The right fund type for you will depend on your tolerance for risk and importantly on you life stage.

You should move only with appropriate advice and for a substantial reason.

Our September review of the Default funds can be found here.

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Update: Milford Conservative Fund 3-yr return added. Westpac and AMP Cash data updated to correct error.

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We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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