Our comprehensive review of Conservative KiwiSaver fund performance to September 30, 2016, identifying who has the best long-term returns

By Craig Simpson

Rising bond yields, increased volatility, and weaker returns from global government bonds have all contributed to a softening in returns compared to last quarter.

ANZ OneAnswer NZ Fixed Interest replaces the ANZ OneAnswer International Fixed Interest as 'best in class' in our leaderboard.

The RBNZ's current easing bias means cash funds will continue to struggle to provide investors with a decent return on an after tax and fees basis.

It also means Conservative Funds with high cash holdings, are not optimising returns for investors. There is currently a substantial difference in the long run returns between the top Conservative funds and Cash funds. In dollar terms, the difference is over $4,000 since April 2008.

Milford has the top performing Conservative Fund, although this is not reflected in our performance tables as our analysis is primarily focused on those funds which started on or before 1 April 2008.

Very little separates the top Conservative funds. The two ANZ OneAnswer funds have had a pick up in returns of late and are cementing themselves at the top of the leader board. Kiwi Wealth's Conservative Fund remains in third spot.

The recent spike in the NZ dollar versus other major currencies has not been enough to prevent the ANZ OneAnswer International Fixed Interest Fund slipping from the top position.

The NZ sharemarket took another downward step last month down 0.5%. The last 12-months have still proved fruitful for those managers with a bias to NZ shares. Of the top performing funds, only Milford has an exposure to NZ shares and this will be part of the reason their fund is so far ahead of other managers over comparative periods.

Assuming you had been invested for the period April 2008 to September 2016, the difference between the average return of the top five Default funds and Conservative funds in dollar terms currently is $1,808 (previously 2,142). This means an investor who is invested outside of the top Conservative fund would be better off in a Default fund. This goes against the principle that a Default fund is a short-term holding place for KiwiSaver funds until such time as the investor chooses a long-term strategy.

The Financial Markets Authority (FMA), which regulates KiwiSaver providers, is encouraging KiwiSavers to be more active in their choice of funds and to switch into the most appropriate non-Default fund based on their tolerance to risk, retirement objectives and investment time horizon.

However, on the strength of our analysis, in a large number of cases, Conservative investors are better off in Default funds rather than the alternative funds shown in the table below.

Here are the full comparisons to September 30, 2016 for Conservative Funds.

Conservative Funds
 
 
 
Cumulative$
contributions
(EE,ER,Govt)
=+Cum net gains
after all tax,fees
Effective*
cum return
=Ending Value
in your account
Effective
last 3yr
return%p.a.
Since April 2008
X
Y
Z
to September 2016
 
 
 
$
%p.a.
$
                 
ANZ OneAnswer NZ Fixed Interest C C FI 28,805 9,885 5.7% 38,690 6.0%
ANZ OneAnswer Int'l Fixed Interest C C FI 28,805 9,583 5.6% 38,388 5.9%
Kiwi Wealth Conservative C C C 28,805 9,447 5.5% 38,251 4.8%
AMP Cash C D Ca 28,805 5,772 3.3% 34,576 2.7%
ASB Cash C D Ca 28,805 5,570 3.2% 34,375 3.0%
Mercer Cash C D Ca 28,805 5,563 3.2% 34,368 2.6%
Booster Enhanced Income C D C 28,805 5,460 3.1% 34,265 2.5%
Fisher Funds Two Preservation C D Ca 28,805 5,438 3.1% 34,243 2.5%
Aon Nikko AM Cash C D Ca 28,805 5,348 3.0% 34,152 2.6%
ANZ Default Cash C D Ca 28,805 5,247 3.0% 34,052 2.6%
ANZ Cash C D Ca 28,805 5,170 2.9% 33,974 2.6%
Westpac Cash C D Ca 28,805 5,162 2.9% 33,967 2.6%
ANZ OneAnswer Cash C D Ca 28,805 4,989 2.8% 33,794 2.5%
Aon ANZ Default Cash C D Ca 28,805 4,297 2.4% 33,101 2.2%
Craigs Fixed Interest C D Ca 23,790 4,497 3.5% 28,287 2.6%
Kiwi Wealth Cash Plus C D Ca 14,332 2,283 3.5% 16,615 2.7%
Kiwi Wealth Cash C D Ca 13,745 2,090 3.2% 15,835 2.3%
Milford Conservative C C C 13,607 4,066 8.6% 17,673 8.6%
BNZ Cash C D Ca 12,083 1,769 2.9% 13,851 1.7%
---------------                
Column X is interest.co.nz definition, column Y is Sorted's definition, column Z is Morningstar's definition

C = Conservative, D = Defensive, Ca = Cash, FI = Fixed Income

Booster was previously known as Grosvenor

Conservative fund observations

The previous quarter's volatility spilled into the latest quarter with markets struggling to come to grips with the Brexit vote.

Market participants have also been contemplating the US Presidential election outcome scenarios and possibly bracing for the worst outcome, a Trump victory.

The top four Default funds have outperformed the Conservative funds to the end of September.

Funds with exposures to global credit or corporate bonds, and to a lesser extent, global sovereign (government) bonds, have outperformed funds with a preference for NZ bonds. The Milford Conservative Fund is almost 50% invested into global bonds which have by-in-large outpeformed NZ bonds.

Movements in the NZ dollar should have seen a small pick up in 100% hedged returns from international fixed income and equity assets over the quarter assuming the positions were fully hedged at the beginning of the quarter and remain untouched.

Funds with a greater global equity position such as the Kiwi Wealth Conservative Fund will have experienced a tick up in their returns compared to the last quarter's report.

Equity exposures in this category remain relatively light and on average across the sector less than 20% of the funds are exposed to equities. The outstanding performance of the domestic market in recent time has led to many funds under-performing our expectations.

The two ANZ OneAnswer fixed interest funds have seen their long-term returns retreat and this will be principally on the back of rising bond yields both domestically and internationally.

Cash fund returns continue to decline in line with interest rate movements. Another fall in the official cash rate (OCR) is expected over the coming months. Cash returns will invariably fall further and remain underwhelming. Luckily with inflation running at near zero percent, the purchasing power of an investors' funds is not being adversely impacted.

Capital Guaranteed Funds

In addition to the mainstream conservative KiwiSaver funds, Westpac has five capital 'guaranteed' funds that were previously offered in this category. The funds are no longer open to new investments but we have continued to gather and report on their performance so you can compare these to the funds above.

Westpac has five plans and they all start at different times:

Capital protected      
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
% pa
since April 2008 X Y Z
to September 2016       $ % p.a. $
                 
Westpac CP Plan 1 C A Mi 26,537 15,866 10.0% 42,404 10.1%
Westpac CP Plan 2 C A Mi 23,282 12,311 10.1% 35,592 9.9%
Westpac CP Plan 3 C A Mi 19,901 9,599 10.5% 29,499 9.7%
Westpac CP Plan 4 C A Mi 16,418 7,160 11.2% 23,578 9.4%
Westpac CP Plan 5 C A Mi 13,205 4,542 10.2% 17,747 6.7%
---------------                
Column X is interest.co.nz definition, column Y is Sorted's definition, column Z is Morningstar's definition
C = Conservative, A = Aggressive, Mi = Miscellaneous

Please note: The Westpac Capital Protected Plans are not open to new investment.

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 you life stage.

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

Our September 2016 review of the default funds can be found 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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4 Comments

is the Milford conservative percentage correct? In the first list?

I've re-run the calculation and based on our method of straight lining performance on an after tax and fees basis I get the same return as in the table.

This is not how the fund managers do performance calculations as they are using the change in unit price either before or after tax (Milford does both).

Our calculation takes into account regular contributions that are made by someone on a median income who was 28 back in 2008 and the inputs are adjusted as wages change. We also deduct all fees whereas many of the managers don't take out the member fee or any other fees that the investor ultimately pays but are not included in the unit pricing. Our calculation also adds in member tax credits and use of money interest at the prescribed rates to account for funds that are held in cash by IRD each month before they come through to the manager.

[On Milford's website the after tax and fund fee return (@17.5%) is listed at 10.19% to end of September - 11.47% on a gross of tax basis]

And are you basing your ranking on the effective return or the 3 year effective return? Which would then mean that that fund should be ranked first?

Our starting point is the contribution total so those funds that have been invested the longest appear first and then the fund is ranked based on the theoretical closing balance.

Funds without the same investment period as their peers will be found down the bottom of our tables and we note this is not a reflection of their performance.

Do you think we could be displaying this data in a better format?