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

By Craig Simpson

The highly anticipated first rate hike since 2006 by the US Federal Reserve (Fed) came and went in December. After so much speculation and hype, when the rate hike finally hit it was a relief. We could finally put this behind us and concentrate on the rest of the year and the events which were turning markets on their heads. The Fed announcement while important in its own right is actually less significant in our opinion than what is happening within China and the rout in commodity prices. 

Volatility spiked during December reflecting investor nervousness around the outlook for China and oil. The 'Santa rally' in equities in the weeks leading up to Christmas was notable by its absence this year and proved to be a pre-cursor for what lay ahead in the first few days of 2016.

A large number of global indices finished the quarter and year in negative territory however domestic assets such as NZ bonds and shares were the star performers in what was a fairly testing quarter for investment managers.

Mercer still number 1

Looking at the Default fund KiwiSaver regular savings returns for the quarter ending December 2015, Mercer has retained its place atop the leader board with a very respectable average long run return of 6.5% p.a. after tax and all fees.

The difference in accumulated wealth between the Mercer Conservative Fund and the average of the top 5 Cash funds was previously $4,154, it is now $4,496.

Our performance table below looks specifically at the performance of the current nine Default options available. The bottom four funds in the table we all added to the sector and as such do not have a long enough track record to allow for meaningful comparisons against those funds which have been in KiwiSaver since April 2008 when our analysis commences.

Since inception, on a regular savings basis, the average compound average annual return of the five Default funds that have been in operation since April 2008 is 5.8% p.a. (previous quarter the average return was also 5.8% p.a.). This rate of return on an after tax and fees basis is still well ahead of what investors are getting on longer dated term deposits at present. Since the June quarter and despite considerable volatility in markets and interest rates the average annual after tax and all fee return from the Default Funds has remained stable at around the 5.8% to 6.1% range.

Assuming you had been invested for the period April 2008 to December 2015, the difference between the average return of the top and bottom Default fund is approximately $1,880 (previously $2,000). It is pleasing to see some contraction in the variance between the first and fifth ranked Default Funds.

The 'best in class' award  for the Default category this quarter goes to the Mercer Conservative Fund which has the highest return over the full period of the review and also has the highest short term return after tax and all fees are deducted.

Here are the full comparison to December 31, 2015 for Default Funds.

Default 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 December 2015      
$
% p.a.
$
       
 
 
 
 
 
 Mercer Conservative C C C
25,648
9,319 6.5% 34,967 6.1%
ANZ Default Conservative C C C
25,648
8,838 6.2% 34,487 5.6%
ASB Conservative C C C
25,648
8,332 5.8% 33,980 5.4%
Fisher Funds Two Cash Enhanced C D C
25,648
8,028 5.6% 33,677 5.1%
AMP Default C C C
25,648
7,440 5.2% 33,088 5.0%
                 
BNZ Conservative C C C 9,168 1,875 5.1% 11,042 n/a
Kiwi Wealth Default C C C 4,930 1,278 4.9% 6,208 n/a
Westpac Defensive C C C 4,930 1,201 3.6% 6,131 n/a
Grosvenor Default Saver C C C 4,657 1,209 4.1% 5,866 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

Default Fund observations

In constructing the latest performance table we have observed that very little has changed in terms of the ranking of the funds. Mercer and ANZ continue to be the stand-out performers and ASB is nipping at their heels.

In the shorter term we have seen some obvious return contraction with the average annual return after tax and all fees from the top five default providers reducing by approximately 1% from 6.4% p.a. in the June quarter to 5.4% in the latest quarter. We noted in our last review there was a core theme of return contraction weaving through all of the KiwiSaver schemes we monitor. A majority of the 1% decline in the short term regular savings returns was recorded in the period June to September.

While the returns have softened so too have bank deposit and cash rates. the spread between the best Default Fund and average of the best cash funds has continued to expand over the past few quarters

The equity component within the Default funds will have until recently been helping extend the gap. There will have been some erosion in returns with many of the funds holding around 20% of their capital in shares and other growth assets however the impact on the total portfolio is relatively small.

Stability in the returns is one of the key characteristics investors in the more defensive KiwiSaver funds are looking for and the Default Funds are delivering this over the long term as we noted above..

Factors impacting on KiwiSaver portfolios 

There was a real mixed bag of influences on KiwiSaver portfolios. High protfile issues such as the rout on China's stock market and the subsequent government intervention to support the market have been extensively covered. So too has the rapid decline of commodity prices which have been correlated to the fortunes of the Chinese markets to a large degree.

The oil price is tipped to remain under considerable pressure and prices have already fallen between 18% and 24% depending on whether you are talking about West Texas Intermediate Crude (-17.9%) or Brent Crude (-24.2%). Subsequent to the quarter end oil has continued to decline and recently touched US$28/bbl, a price we have not seen in some time.

The gold price continued to yo-yo up and down and ended the month marginally in negative territory. For the quarter gold was down nearly 5% in USD terms and for the year the precious metal was down just over 10% in USD terms.

Major equity indices in the US and UK finished the year in negative territory, while European shares although down heavily in December, actually posted solid gains for the year (in local currency terms).

Another star in an otherwise gloomy quarter was the local market. New Zealand bonds and shares were some of the best performers across developed markets. The NZX50 finished 2015 on an all time high levels while other markets finished off their previous highs.

Again we have seen investors or funds with a large bias towards NZ assets (bonds, shares, property) enjoy some favourable returns.

We must keep in mind though that the local market is incredibly small and illiquid in a global sense. Investors with large domestic biases could be prone to some large and swift movements in asset prices should markets revert back to some state of being more fairly priced based on underlying fundamentals.

Australian shares did not enjoy the same pick up as their Kiwi cousins principally due to volatility in iron ore prices and their close economic ties with China.

Diverse hedging policies across the various KiwiSaver portfolios continues to influence returns. The New Zealand dollar's depreciation helped unhedged KiwiSaver investors enjoy a strong 13.2% return from global equities over the entire year, although the NZD appreciated against the AUD and USD over the fourth quarter, particularly in December.

In the immediate future we are hoping to see stability in China’s financial markets along with positive economic data and no surprises. As we head into 2015 Q4 earnings reporting season in the US investors will be looking for companies to exceed guidance and analyst forecasts as well as the Fed to make sound and considered decisions when it comes to implementing rate hikes this year.

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KiwiSaver default funds are only part of a broader range of conservative funds available. Many of the 'traditional' Conservative and Cash funds are underperforming the Default funds. We will look at the rest of the Conservative funds in another article.

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 your life stage.

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

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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2 Comments

The Cash funds may become the better performers over 2016/17?

What you are suggesting is that we have a perfect situation of rising cash rates in NZ (and higher mortgage rates) and rising global bond yields which would mean bonds are facing capital losses on a mark to market basis.

How do you see this happening?