Our comprehensive review of KiwiSaver Growth funds to December 31, 2015 identifies the top performers in a world of contracting returns

The previous quarter's theme of volatility and difficult investment conditions extended into December with falling stock and commodity prices front of mind. 

Some of the managers in our KiwiSaver Growth universe handled this tricky environment better than others and we have seen a reshuffle at the top of the performance ranking table over the long term.

A portion of the movement near the top of the table was due to the removal of the Staples Rodway Balanced Fund. This scheme is now closed to new investment and we are no longer going to include this fund in our analysis.

Interestingly there was an improvement in returns for some funds that have been fully vested since April 2008. Six funds achieved returns above 9% on average over the long term on an after tax and all fees basis, last quarter the number was four.

A majority of the funds in this category were able to achieve returns in the short term (i.e last three years) that were over and above the funds long term returns (i.e. since April 2008).

Those cynics and DIYers out there would suggest managers got lucky. While this may be partly true, there is also a large element of skill required to grow the value of an investors portfolio in a market that is falling and when volatility is spiking.

Our regular savings model suggest investing in the top five funds in this category would have yielded $14,400 more than our sample investor contributed. The average Growth fund earnings after-tax and after-fees is $6,000 more than what was earned in the average of the top five Default funds.

  Aon Russell LifePoints Growth takes out the best in class award as it is the top performer over the long run and has also produced a three year return that is either equal to or greater than its long run return. This fund retakes the top position in our ranking table after previously being knocked down to number two.

Here are the full comparison as at December 31, 2015 for Growth Funds.

Growth 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.
$
                 
  Aon Russell LifePoints Growth G G G 25,648 14,877 9.8% 40,526 10.6%
AMP ANZ Default Balanced G B G 25,648 14,687 9.7% 40,336 9.6%
ANZ OneAnswer Balanced Growth G G G 25,648 14,392 9.5% 40,040 9.8%
ANZ Balanced Growth G G G 25,648 14,248 9.5% 39,896 9.8%
Aon Russell LifePoints 2035 G G G 25,648 13,889 9.3% 39,538 9.7%
Aon Russell LifePoints Balanced G B B 25,648 13,670 9.1% 39,319 9.3%
ANZ Default Balanced Growth G G G 25,648 13,255 8.9% 38,904 9.7%
Aon ANZ Default Balanced G B B 25,648 12,582 8.5% 38,231 7.9%
ASB Balanced G B B 25,648 12,482 8.4% 38,077 9.0%
Fisher Funds Two Growth G G G 25,648 11,832 8.1% 37,481 8.7%
Mercer Balanced* G G G 25,648 11,765 8.0% 37,414 8.0%
Westpac Balanced G B B 25,648 11,402 7.8% 37,050 8.2%
Craigs Growth G G   25,648 10,828 7.4% 36,477 7.8%
Craigs Balanced G B   25,648 10,177 7.0% 35,826 7.1%
AMP Balanced G B B 25,648 9,540 6.6% 35,189 5.9%
Craigs Balanced SRI G B   25,648 9,338 6.5% 34,986 6.8%
-------------------        
Column X is interest.co.nz definition, column Y is Sorted's definition, column Z is Morningstar's definition
G = 'Growth', B = 'Balanced', A = 'Aggressive'

The Mercer KiwiSaver Scheme Balanced Fund asset allocation has recently changed and the fund has now been reclassified as Balanced by interest.co.nz, Sorted and Morningstar. Mercer's Balanced will now appear in the Balanced category review.

 

The following Growth funds have not been going long enough to be included in the above table.

Growth 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 X Y Z
to September 2015      
$
% p.a.
$
                 
Grosvenor Balanced Growth G G G 18,926 6,189 7.3% 25,115 7.2%
BNZ Growth G G G 9,168 2,370 7.8% 11,538
n/a
Generate Growth G G G 8,945 2,651 9.7% 11,596
n/a
-------------------        
Column X is interest.co.nz definition, column Y is Sorted's definition, column Z is Morningstar's definition
G = Growth, B = Balanced, A = Aggressive

Top performing fund characteristics

One of the characteristics of a top performing fund is reputation of the organisation and the team managing your money. The better performing funds have teams with plenty of miles on the clock and the institutions themselves are well respected and have a high degree of financial stability.

Many NZ based managers recognise they don't have the necessary expertise or access to information to manage international assets. The better performing funds outsource the management of the underlying securities to third party global managers. Although not directly responsible for the actual security selections in some instances, KiwiSaver providers will either control or have input into the manager selection, asset allocation and currency hedging which are ultimately more important than the underlying investments that make up the portfolio.

Hedging ranges differ across the top performers although international bonds and property assets are consistently fully hedged back to NZ dollars. Examples of the current hedging policies of the top funds is shown below:

  • Aon has a benchmark hedging policy which is 50% for international equities and 100% for international bonds.
  • OneAnswer, owned by ANZ, has a policy of hedging international fixed interest assets, international property and some foreign share exposures. The international share component will carry the biggest currency risk for investors and at any given time they could be completely unhedged. OneAnswer run a dynamic hedging position for international shares based on the outlook for the NZ dollar.
  • AMP ANZ Balanced fund is fully hedged across international fixed interest and property assets, has a 50% benchmark position for Australian shares and 65% benchmark position for international shares. The Australian and international share hedging range can be between 0% and 100%.

Another common trait across the top five funds in this sector is that the exposure to international shares is roughly 2x the Australasian exposure and there is a bias to international bonds vs domestic bonds.

The ANZ run funds all have an exposure to property and this is split 50/50 between Australasian and international.

The overall benchmark target allocation between income and growth assets various between 25% income/75% growth (Aon Russell Lifepoints Growth) through to 40% income/60% growth (Aon Russell Lifepoints 2035). The AMP & ANZ run funds are roughly 35% income and 65% growth.

There are some subtle differences between the top performers and it is important to understand the mechanics of the funds and what is driving the returns.

Regular reviews

Our sample investor under the regular saving return model has approximately $35,000 saved after approximately 8 years. Many readers will have considerably more that this total and it is important to review your strategy on a regular basis. The heightened levels of volatility and uncertainty present and opportune time to make sure you are in a fund that meets your goals, objectives and expectations.

If you are going to review your KiwiSaver fund here are some points to keep in mind.

  • KiwiSaver is a long-term retirement savings scheme. It is not a get rich quick plan. It requires patience and understanding that the value of your investment will go up and down.
  • Understand where your money is invested and ask questions of your provider if you are not sure or can't find the information on line.
  • Have a clear picture of your tolerance to risk. How would you feel if your KiwiSaver fund lost 5%, 10% or even 25% in any one year.?
  • There is no such thing as a free lunch, you still have to save little and often to get the government contribution of 50c per $1 of your own contributions (excludes your employers contributions) up to $521.43. For many, wage deductions will be more than sufficient to achieve the required threshold savings level of just over $20 per week. Even if you can save less than this amount, the government will still contribute to your savings account, you just don't get the full member tax credit.
  • If you have access to your KiwiSaver on-line via a secure website or portal, don't look at your balance every day - you will freak out when there is a dip in the market.
  • Investing on a regular basis will help smooth out some of the volatility as you acquire more units in the fund when the prices are down and when they go back up those units should increase in value.
  • Get advice from an Authorised Financial Adviser. Understand that this adviser may have conflicts of interest if they work for a company and promote their own funds. They are required to disclose this and put your interests first.

One important trap to be aware of is getting trapped into chasing last year's winners. Frequent chopping and changing across funds, schemes or managers will cost you money, have you out of the market for periods and not earning a return on your capital.

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

Across the industry there is currently no consistency on how funds are categorised. We have found that sometimes the fund name can be misleading and it is important to completely understand what drives the funds performance (asset allocation, investment philosophy etc) and be aware of how the underlying portfolio of securities is made up and where the potential variability in monthly or annual returns may come from.

To learn more about how we categorise the various funds click 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 the Default, Conservative, Moderate, and Balanced funds can be found here, here, 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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7 Comments

All worse than S&P/NZX 50 Portfolio Index

Over what time frame is your comparison and is your performance allowing for any tax, or are you comparing a gross index to an after tax and fee return?

Assume before taxes and fees. P3Y capital index changed 12.04% p.a. Gross dividend yield of 5.06%.

http://smartshares.co.nz/types-of-funds/smartlarge/fnz

We are assessing KS performance like forex rates ?

I certainly hope not.

Why don't we have a benchmark to compare these against? Relative performance only tells us how similar each of the funds are structured relative to the others. I'd suggest using the Superlife global equity ETF as a comparison as this represents 96% of global investable equities across all markets, is fully passive and post-tax figures will be available.

Benchmarks are reasonably arbitary and overall not that useful.Often you are not comparing like with like, and your suggestions of using a global equity benchmark is an example of this.

If you did want to design a benchmark would have to include cash, fixed interest, property and shares, not just the global equity ETF. Then you would have to have consensus on weightings to each sector, which indices would make up your proxy for each market and whether the global indices are hedged (what %) or unhedged.

In an ideal world managers would have to report risk adjusted return data and a plethora of other statistical data that is relevant to that specific portfolio. This sort of data is far more meaningful and relevant.