Our comprehensive review of Moderate fund regular savings returns as at December 31, 2015, identifying who has the best long-term returns

The December quarter was a testing one for investors. Nerves were frayed and investors left questioning the value of their long term strategy.

There were some bright spots among all the doom and gloom, however.

Domestic assets again proved to be some of the best performers across global developed markets. Even with falls in global equity markets and heightened levels of volatility not one fund within the Moderate KiwiSaver category recorded a negative return for the year on a before-tax-and-after-all-fees basis.

Moderate KiwiSaver funds have approximately one third of their capital invested into growth assets (e.g shares) with the remaining two thirds in assets such as bonds and cash. The larger exposure to bonds and cash has offset the loses made on the growth assets.

The long run returns are holding at similar levels to the last review to the end of September. Given all the chaos in markets over the past six month, kudos has to be given to the various scheme providers for the way they have weathered the storm.

Over the full term of our regular savings analysis, the top 5 Moderate funds compared to the 5 Default funds which have been going since April 2008, Moderate funds have delivered an extra $2,200 worth of returns on average after-tax-and-all-fees.

For our best in class award a fund would normally have to be ranked number 1 in the long term category and also have a three year return which was above the long term average. In this review we have awarded the best in class title to two funds, Aon Russell LifePoints 2015 and ANZ OneAnswer Conservative Balanced Fund. We have done this on the basis that the Aon fund is the top performer in the sector and is deserving of the award, however the ANZ OneAnswer fund is clearly better on a three year basis based on our calculations and methodology. The actual difference between the number 1 & 2 funds in this category is so small we would call them identical. We therefore feel ANZ OneAnswer are also worthy of the best in class title for this particular review period and hence our decision to award both funds the honour of best in class.

Here is the comparison to December 2015 for Moderate Funds:

Moderate 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.
$
                 
 Aon Russell LifePoints 2015 M C M
25,648
10,850 7.4% 36,499 6.3%
  ANZ OneAnswer Cons. Balanced M B M
25,648
10,642 7.3% 36,290 6.9%
ANZ Conservative Balanced M B M
25,648
10,590 7.3% 36,239 7.0%
Aon Russell LifePoints Conserv M C C 25,648 10,549 7.3% 36,197 5.9%
ANZ Default Conserv. Balanced M B M
25,648
10,241 7.1% 35,890 6.9%
Fisher Funds TWO Conserv M C M 25,648 8,718 6.1% 34,366 5.4%
ANZ OneAnswer Conservative M C C 25,648 8,696 6.1% 34,345 5.5%
ANZ Conservative M C C 25,648 8,648 6.0% 34,297 5.5%
Westpac Conservative M C M
25,648
8,460 5.9% 34,109 5.3%
AMP Moderate M B M 25,648 8,305 5.8% 33,954 4.9%
AMP Conservative M C M 25,648 7,791 5.4% 33,440 4.3%
Craigs Conservative M C   25,648 7,746 5.4% 33,395 5.0%
Grosvenor Conservative M C M 25,648 7,700 5.4% 33,348 4.4%
Fisher Funds Conservative M C C
21,862
6,009 5.5% 27,871 5.2%

Those funds that have recently launched and do not have a long enough track record to be included in the main table above are shown below:

Moderate 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 2015      
$
% p.a.
$
                 
BNZ Moderate M B M 9,168 2,029 6.0% 11,196
n/a
Generate Conservative M C M 8,945 2,075 6.5% 11,021
n/a

Observations and factors driving performance

As we highlighted in our review of Default funds the main factors impacting KiwiSaver balances has been a combination of ongoing concerns with China and the rout in commodity markets. To find out more please refer to our previous review here.

The Fisher Funds Conservative fund has not been operating for the entire period and therefore its position in the table does not reflect its comparative performance versus other funds in the peer group.

One interesting observation from analysing the data and some of the drivers behind the various fund performance is we noted the top two funds in the Moderate category have completely different asset allocations as at December 31, 2015. Despite this different approach to asset allocation and investment management, they are for all intents and purposes offering identical long run returns.

The major differences between the Aon Russell LifePoints 2015  and ANZ OneAnswer Conservative Balanced funds lies primarily in the bond and cash allocations. These differences can be summarised this way:

  • Aon's top ranking fund has 64% exposure to global bonds vs ANZ OneAnswer's Conservative Balanced allocation of 30.2%. The allocations to global bonds are hedged back to NZ dollars.
  • ANZ OneAnswer has elected to have a mix of NZ bonds and cash as part of their domestic fixed income exposure whereas Aon does not have a specific cash exposure.
  • The exposure to growth assets is also different with ANZ OneAnswer favouring a greater exposure to international shares and actively managing the hedging position (benchmark is 65% but can be between 0% and 100%) whereas Aon has gone for the "bob each way" approach and is sitting with 50% hedged and 50% unhedged. The percentage exposure to Australian equities across the two funds is roughly the same.
  • ANZ OneAnswer also has an exposure to listed property both in Australasian and internationally and this is hedged back to NZ dollars where applicable. Aon traditionally has not had exposure to property across their portfolios (there is some property in the fund ANZ manages on behalf of Aon.
  • Aon's overall asset allocation is more skewed to income assets as opposed to growth assets and this will have served them well in recent times.

Within the wider performance rankings there has been some positional shifting with the biggest mover up the table being Fisher Funds Two Conservative Fund which climbs three spots. In contrast AMP Moderate Fund had the biggest fall. Based on periodic disclosure reports dated end of September, Fisher Funds Two Conservative Fund was holding an overweight position in Cash (compared to its stated benchmark). This move will have put the portfolio on a good footing heading into the December quarter and will have had a positive impact on the overall portfolio.

In contrast, for the same period disclosure reporting period (to end of September) the AMP Moderate Fund had a small overweight position to global shares and the other investment category which includes assets such as infrastructure and commodities. As it turns out, AMP's portfolio positioning heading into the quarter proved to be less than ideal but of course hindsight is a wonderful thing.

Since last quarter's survey of regular return performance the return differential between the top Default and top Moderate fund has continued to close reflecting the performance of fixed income assets versus shares.

The top managers in the sector continue to deliver 7% p.a. on an after tax and all fees basis over the longer term which is extremely good when you consider a large number of markets finished in the red for the year in local currency terms.

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Across the industry there is currently no consistency on how funds are categorised so readers will see funds with different risk descriptors (i.e. Conservative, Conservative Balanced & Moderate) appearing in the performance table. To learn more about how we categorise the various funds click here.

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.

Our December reviews of Default and Conservative funds can be found here and here.

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

OK, these are "moderate funds." The S&P/NZX 50 ETF has returned 12% p.a. in capital growth over the past 3 years. Comparatively speaking, it appears that these moderate funds must have limited downside compared to the index if the worm turns.

The make up of the moderate funds is approximately 35% equities and 65% income assets so when the worm turns the NZX50 should take the full brunt of the pain and the moderate funds should in theory at least be modestly impacted.

We have seen the NZX 50 hold up incredibly well over the past 3 years and some of this support will be coming from the strength of the underlying economy and also the quality of the companies in the index. The other part will be the flood of KiwiSaver money that needs to find a home in the NZ market.

The asset allocation data we are seeing shows a clear home market bias across a number of managers and this is supporting the market.

We will invariably get to a point where managers won't be able to find enough stock on the NZX. They will then be forced to divert cash to unlisted assets (private placements or private equity type investments) and this decreases the liquidity of the fund and increases the risk for KiwiSaver investors.