By Amanda Morrall
Q) How long will you have to be part of a KiwiSaver scheme before you can evaluate its performance,e.g. I've been with a scheme and opted for the "aggressive" investment. In that first year government contributions and my own (self employed) have not grown at all, even though the fund is ranked in the top three on your performance list.
In other words, would it be worthwhile me investing with a bank? My partners balance has actually gone down in the same time with another provider.
A) Performance of managed funds is a sticky issue and depends on a number of factors including time frame for investment, your risk appetite, fees and taxes.
I need to state upfront that I am not an Authorised Financial Adviser which, by law, is the only person who is eligible to give you personalised advice on this subject matter.
As a journalist and an entry-level investor myself, I can speak in general terms and also share with you what I have learned along the way.
"Aggressive" or "growth" funds, like the one you are in, have a higher weighting of equities and are therefore more volatile (see our GAP ratio measure), which means you are very much at the mercy of the markets. I'm not sure when you first signed up with your provider but the fact that you haven't seen much movement could be that it is still early days.
Also, as you don't have the benefit of employer contributions, you are more disadvantaged in terms of the amount of those regular contributions going into your KiwiSaver account. With National's proposed changes to KiwiSaver (one of which will begin next month) it could be that KiwiSaver does not make as much sense for you as it used to with Member Tax Credits being cut in half. This is something you should look into closer.
In terms of how long you should wait to see a satisfactory performance, the answer will vary depending on who you talk to. I put that same question to Australia fund manager Kerr Neilson a few years ago (this guy is regarded as an industry "rock start" because his active management style has resulted in consistent above average returns over the years - close to 14%!). He suggested that you could not properly judge the performance of a fund manager (at least those who aim to achieve higher than normal returns) for at least five years. In fact, he suggested a meaningful track record could only really be established after seven or 10 years.
That may not be of much comfort if you are watching your funds go nowhere while they get eaten away by tax, fees and inflation and similarly with your partner's. I've personally seen a 5% slide in a ""growth" fund that I own and have been wondering whether to pull the plug myself. I raised the issue recently with a fund manager acquaintance who laughed and said if I could not tolerate a 5% risk then I should not be investing. The remark smarted but they made a good point probably. Investing is a form of gambling really but it's a calculated risk. With the fund you are in, you are sitting at the craps table I reckon, not that that makes it any better when you get crap returns.
If you are invested in an aggressive fund, it is because you have made a conscious choice to gun for higher returns and accept the risk of higher volatility. I don't know your age or how far away you are from retirement but that's something that hopefully was taken into consideration as part of your decision to be in this fund. Your provider (or a financial adviser) should have spelled that out for you before you ticked this box.
If not, don't beat yourself up it. I signed up both my children to growth funds (with the assumption they had plenty of time to ride out volatility) and was told (in hindsight) by the provider all sorts of stuff about the fund that they suggested was well articulated in advance to anyone who signed up. I had no intelligent guidance and made the decision more or less around the fact that it was billed as a socially responsible investment, the intergrity of which I now seriously question.
If you don't have someone whom you respect, trust and feel is well qualified to give you guidance on this issue, I would suggest pressing your provider for answers. Why not make them work for their money? Aggressive funds normally have higher fees so as you are paying for the privilege of ostensibly earning higher returns, I think you're within your rights to hold them to account and else cough up some answers that make sense to you.
They might give you short shift but in my experience you need to make the extra effort, phone call or visit to get some answers. Personally, I wouldn't settle for a phone call. I have yet to be impressed by the quality of service and advice I have received over the phone in speaking to a provider.
And here's another thought. If you are contemplating shifting providers, go pay that prospective provider a visit in advance, ask to see one of their Authorised Financial Adviser so you can get their opinion on the issue. If they're hungry for your business, which they should be as this is proving to be an increasingly competitive market with KiwiSaver funds going up in value, they should be prepared to give you some time and make some recommendations. Make sure you ask about the self-employment bit.
With the new financial regulations in place, someone with an AFA, should (in theory) be well placed to advise whether an aggressive fund is right for you and whether the returns it has delivered thus far are adequate. Don't settle for a registered adviser, as there would appear to be some instances where an RA is legally allowed to act as a KiwiSaver sales agent.
All this takes time and effort but if you go through this exercise with your current provider and a prospective one, I'm guessing you'll at least come away feeling a bit more knowledgeable and more in control of your fund.
I'd recommend your partner do the same thing particularly if her fund is losing money and has been for several years. A financial adviser would probably be the ideal candidate as they would -- or should -- examine your KiwiSaver fund as part of an overall financial plan.
KiwiSaver is just one piece of a financial puzzle and it is a long-term savings vehicle which is important to bear in mind in the context of performance. (See the Institute of Financial Adviser's website here for tips on how to choose a financial adviser).
I hope this provides some food for thought.