Are fund managers who are heavily weighted to local markets exposing investors to greater levels of risk?

By Craig Simpson

Our regular series of KiwiSaver category reviews, analysis of asset allocations and top holdings has highlighted that a number of schemes have large exposures to New Zealand bonds and shares within their portfolios.

We can't understand why some local managers would be willing to expose investors to additional risk by tilting heavily to a market that is not broadly diversified across all of the major industrial sectors or sub-sectors; is as small as a pimple on an elephant's bottom in terms of market capitalisation; and doesn't have a high degree of liquidity within stocks outside the top 10 companies (roughly 46% of the NZX50 index).

As at September 2015, there was a total of $30.3 bln in KiwiSaver accounts according to Reserve Bank of New Zealand (RBNZ) statistics. Of this $30.3 billion, approximately 50% was invested in NZ domiciled assets.

Just over $1 bln was transfered from Inland Revenue to KiwiSaver providers in the quarter ending December 2015. On average over the last 12-months, over $400 mln per month (including member tax credit payments) has been looking for a new home. With roughly $200 million per month trying to find a home in NZ assets is it any wonder that the domestic markets is holding up so well?

If we compare our findings to the NZ Super Fund which is a very long term investment portfolio, 65% of the fund's equity allocation is tilted towards global shares with just 4% in NZ shares at 31 December 2015. This type of weighting is more reflective of the overall size of the NZ market and economy as a whole.

We do expect actively managed KiwiSaver funds to have tilts to various markets or regions from time to time as a means to enhancing the investors returns however we have some concerns that within the conservative KiwiSaver strategies, investors in some funds could be exposed to a greater level of risk than they would otherwise be prepared to accept if they were to invest on their own accord.

It is important investors understand the make-up of their KiwiSaver portfolio and how their manager invests their savings, along with the returns are being generated. Remember, everyone is happy when markets are rosy and stellar returns are being made; the real test of your KiwiSaver managers metal is when markets are falling and volatile - like they have been for the last half of 2015 and early 2016. 

Sayonara Staples Rodway

The Staples Rodway scheme is in the throes of being transferred into Funds Administration New Zealand Limited (FANZ), Southland Building Society’s (SBS Bank) managed funds and investment advisory business.

As the Staples Rodway funds are closed to new business we are no longer reporting on these.

Lifestages rejigs its offer

The two lifestages funds (Capital Stable & Growth) were closed to new investment and two new funds have been created to take their place: Lifestages Income Fund & Lifestages High Growth Fund. We will begin reporting on these two funds in our next round of KiwiSaver reviews following the March 2016 results.

Best of the best

The funds to be awarded or special 'best in class' badge across all the various categories are listed below. These funds are the best-of-the-best as at the end of December 2015 in our opinion.

Compared to the last best in class summary to September 30, 2015, the main changes are Aon Russell Lifepoints Growth replaces ANZ's OneAnswer Balanced Growth Fund and we have also added ANZ's OneAnswer Conservative Balanced Fund as a joint recipient of the award in the Moderate category as the returns from the two top funds are almost identical (for the reasons we set out here).

Default: Mercer Conservative Fund

Conservative: Kiwi Wealth Conservative Fund

ModerateAon Russell LifePoints 2015 & ANZ OneAnswer Cons. Balanced

Balanced: AMP Nikko AM Balanced

Growth: Aon Russell LifePoints Growth

Aggressive: Milford Active Growth

The table below highlights the best funds in each main class, and the range of returns between the top and bottom performers.

This is the list of the top funds at December 31, 2015 based on our regular savings return model. For the purpose of comparison we have only used those managers who have been in existence for the entire analysis period of April 2008 to December 2015.

Category Top 3 Funds Average of Top Five
after fees
after tax
Average of Bottom Five
after fees
after tax
# of funds invested for
full period
Top long-term return
after fees
after tax
           
Aggressive   12.5% 7.4% 20  
Milford Active Growth   13.3%
#2 Aon Milford    
#3 ANZ OneAnswer Australasian Property    
           
Growth   9.6% 7.1% 16  
Aon Russell LifePoints Growth   9.8%
#2 AMP ANZ Default Balanced    
#3 ANZ OneAnswer Balanced Growth    
           
Balanced   8.5% 6.9% 13  
AMP Nikko AM Balanced   8.8%
#2 ANZ OneAnswer Balanced    
#3 ANZ Balanced    
           
Moderate   7.3% 5.6% 13  
Aon Russell LifePoints 2015   7.4%
ANZ OneAnswer Cons. Balanced   7.3%
#3 ANZ Conservative Balanced    
           
Conservative1   4.5% n/a3 7  
Kiwi Wealth Conservative   5.7%
#2 ANZ OneAnswer NZ Fixed Interest    
#3 ANZ OneAnswer Int'l Fixed Interest    
           
Default2   5.9% n/a3 9  
Mercer Conservative   6.5%
#2 ANZ Default Conservative    
#3 ASB Conservative    

1. The Conservative Fund data in the table excludes cash and default funds.
2. There are now nine default funds, however only five have been in existence for the full period of our analysis.
3. Insufficient number of funds to provide data.

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

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 December reviews of the Default, Conservative, Moderate, Balanced, Growth and Aggressive funds can be found here, here, 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?

We welcome your comments below. If you are not already registered, please register to comment or click on the "Register" link below a comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.

9 Comments

Q: Are KWS accounts exempt from the OBR? Some banks are running KS portfolios

Q: Are PIE 'Trust" accounts exempt from the OBR?

Let's get some clarity.

A few article suggestions there for you guys Interest.co.nz

The Smartshares NZX50 outperforms all of these aggregates according to their website. It's not supposed to work like that.

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

I don't think so. Our assessment is the equivalent after-tax-after-all-fees track record since April 2008. In other words, a true long term return, weighted by the growth in regular savings contributions (a key distinction). And stated as a long term equivalent % per annum.

The SmartShare performance is short-term, point-to-point, ignoring fees, taxes, etc. Not comparable.

We would love to make a comparison on the same regular-savings basis. Do you know where their long-term data can be sourced?

Thanks for clearing that up. Was wondering if fees had something to do with it.
.
This site is a very good resource for super or kiwi funds. Am in the middle of looking at rebalancing my portfolio, as I've just hit a new age bracket.

All of the smartshares' ETFs are quoted on the NZX net of fees and taxes. FNZ is the best benchmark for NZ equity comparison. Daily historical prices back to 2004 are freely available here https://nz.finance.yahoo.com/q/hp?s=FNZ.NZ.

You will need to add in dividend distributions as these are paid out rather than re-invested.

Actually dividends can be re-invested. I've been in Smartshares from Day 1 and chose to re-invest dividends.

Yes, but these are not represented in the price - you need to add the corresponding extra units to get the % return for this comparison

Thanks David. Smartshares were established in 2007 but I don't know how to source their long-term data. This could be an interesting comparative benchmark for interest.co.nz,

If you haven't seen, they have a metric showing a 5-year annualised return ("returns calculated on NTA movement, assuming distributions reinvested on payment date, after tax and management fee").

The 5-year annualised return is 12.98%.

Those flow numbers reveal that the Kiwi equity market is just one big ponzi scheme. Allocators are simply reckless in holding such massive overweights to the NZ market.