Our comprehensive review of Balanced KiwiSaver fund returns to June 30, 2016, identifying who has the best long-term returns

By Craig Simpson

A greater exposure to growth and riskier assets is begining to hurt some of the KiwiSaver funds in the Balanced category.

A consistent theme of return retraction is appearing across the KiwiSaver funds we have reviewed this quarter.

Mercer Balanced fund was the only scheme that improved on their long-term and short-term returns based on our regular savings return methodology. Fisher Funds Two Balanced fund also improved its three year returns while ASB's Moderate fund held steady.

Last quarter, we highlighted some of the funds were venturing off the traditional and well worn asset allocation path and in doing so were generating some superior returns. As we all know, concentrating on returns is fraught with danger. Unexpected results such as the outcome of the UK's Brexit vote can often derail a fund's strategy. This appears to have been the case with the AMP Nikko AM Balanced fund this quarter.

They've lost their top spot in our regular saving performance table and overtaken with funds managed by AON and ANZ.

The best performers over the last three years on a regular savings return basis are the AMP Nikko AM Balanced fund and Milford Balanced fund each returning 9.2% p.a.

Interestingly, the AMP Nikko AM Balanced fund unit price over the last month was -2.1% compared to the average return for our entire Balanced category of -0.9% (-0.8% if you take out the AMP fund from the calculation). The most recent performance appears to have done something of a cliff dive compared to their peers. The return for the three-month period is 0.7% which is considerably better and marginally behind the sector average. The 12-month unit price change makes this fund one of the top performers. This level of volatilty in the short term may concern some investors and its something you need to be aware of when selecting your KiwiSaver fund.

On a regular saving basis over the period from April 2008 to June 2016 the gap between the top and bottom Balanced fund is now 2.2%. The past two reviews for the end of March 2016 and December 2015 showed the differences as 2.7% and 2.6% respectively.

The average annual return of the top 5 Balanced funds to the top 5 Default funds the differential is now 2.05%. The margin was previously 2.9% p.a as at the end of June. There has been some serious compression in returns compared to the last quarter and it is getting to the point where you question whether a 2% differential between a medium risk and a low risk fund is adequate compensation.

  Aon Russell LifePoints 2025 is the top performer in this category and has received our ‘best-in-class’ title for this quarter. The three year return normally has to be equal to, or above, the long term return to get this accolade and in this instance the difference is due to rounding and therefore we have decided to award the fund best in class for the quarter. 

Here is the comparison as at June 2016 for Balanced Funds:

Balanced 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 June 2016      
$
% p.a.
$
                 
  Aon Russell LifePoints 2025 B B B 27,378 13,786 8.2% 41,164 8.1%
ANZ OneAnswer Balanced B B B 27,378 13,547 8.1% 40,925 8.3%
Aon Russell LifePoints Moderate B B M 27,378 13,533 8.1% 40,911 8.0%
AMP Nikko AM Balanced B G G 27,378 13,382 8.0% 40,760 9.2%
ANZ Balanced B B B 27,378 13,370 8.0% 40,748 8.2%
Mercer Balanced B B B 27,378 13,078 7.8% 40,456 7.8%
Aon Nikko AM Balanced B G G 27,378 12,878 7.7% 40,256 9.0%
ANZ Default Balanced B B B 27,378 12,651 7.6% 40,029 8.0%
ASB Moderate B B M 27,378 12,428 7.5% 39,806 8.0%
AMP Fisher Funds Two Balanced B B B 27,378 11,561 7.0% 38,939 7.8%
Fisher Funds Two Balanced B B B 27,378 10,986 6.7% 38,364 7.2%
Kiwi Wealth Balanced Fund B B B 27,378 10,431 6.4% 37,809 6.2%
AMP Moderate Balanced B B B 27,378 9,851 6.0% 37,230 6.3%
Grosvenor Balanced B B B 27,378 9,743 6.0% 37,121 6.5%
Milford Balanced B B B 20,526 10,252 10.2% 30,778 9.2%
BNZ Balanced B B B 10,720 2,564 6.6% 13,283 6.0%

Our June reviews of the Default, Conservative, and Moderate funds can be found here, here, and here.

Observations and factors driving performance

The main drivers impacting performance of KiwiSavers funds as part of this review have been based around asset allocation and hedging of international assets.

Funds with weighting biases towards NZ equities and government bonds, both local and global have on average been the better performers across this category. Security selection will be contributing to some of the performance differential across the managers.

Interestingly the ANZ One Answer Balanced Fund has close to 20% cash in the portfolio ast at 30 June. This is considerably higher than their immediate competitors but does not appear to have hampered their performance. ANZ's portfolio also has some of the highest exposures to property which will be adding value.

Out of the top four funds, ANZ OneAnswer Balanced fund has an advantage of having a lower fee structure. There is between 25bps and 40bps difference in the fees between ANZ's fund and the two AON funds and the AMP Nikko AM Balanced fund. This fee differential is substantial when compounded over time and provides ANZ with a healthy return pickup. 

AON's two portfolio have the largest exposures to global bonds with just under 50% of the allocation invested in this asset class. This is by far one of the biggest exposures to global bonds we have seen across all the managers and might help explain some of the additional returns they've been able to pick up.

There are only very small differences between the two AON Russell Lifepoints products (2025 target date and Moderate fund) in terms of returns and major holdings. The securities are the same, the holding size is marginally different so for all intents and purposes they could be treated as being one in the same, although the target date fund has a limited shelf life.

Mercer Balanced has been one of the bigger movers during the reporting period. They are the only manager to show improvement in their returns over both long and short-term periods. The asset allocation and manager selection are pin-pointed as the two primary drivers behind Mercer's leap-frog up the leaderboard.

Defensive positioning in a core global equity selection along wtih exposure to 'low volatility' securities has enabled Mercer to outperform the broader market. The exposure to commodities and emerging markets, which for a majority of the last 12-months have impaired performacne of the portfolio, have started to rebound strongly over the past quarter. The specialist global bond managers (Sovereign and Credit) used by Mercer have outperformed more traditional global bond strategies.

Kiwi Wealth's performance in this category is being impaired by the lack of NZ share exposure. The manager also has around12.5% cash at 30 June, which will be helping to reduce some of the risk in the portfolio arising from the 48% exposure to global shares.

Any fund in the bottom quarter of the table you can pressume is not over weight to the sectors we've identified as being contributing to the performance of the top funds.

The Milford and BNZ Balanced funds have not been going for the full period and hence they appear at the bottom of the table which is ranked firstly on value of total contributions and then performance. These two funds should not been considered as part of the bottom quarter of performers and you need to assess these funds on their own merits.

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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.

 

Updated: Correction made to comment re AMP Nikko AM Balanced Fund return. The one month unit price change was -2.14%, rather than this being the three month change.

 

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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