KiwiSaver Q&A: Amanda Morrall takes a closer look at lifestages KiwiSaver funds and how they differ from other offerings on the market.

Q) I read somewhere that there are some kiwisaver schemes that are specifically designed with younger people in mind, putting your kiwisaver funds into higher risk investments when you are young and then moving them to more conservative ones the older you get.  Can you tell me which providers offer this kind of scheme?

A) Hi, thanks for your email. The schemes you are presumably referring to are called "lifestages" KiwiSaver funds.

Rather than having to chose between a conservative, balanced, moderate, growth or aggressive fund (the five main category of funds on the market) lifestages funds give you an asset allocation that is age specific and self-adjusting.

Modern investment theory has it that the younger you are the greater volatility you can afford to tolerate. Many would argue that is particularly the case with KiwiSaver because it is a retirement saving vehicle and you could be in it for 30 to 40 years if you enroll when you first join the workforce out of college.

While the composition of these funds varies from provider to provider and from fund to fund, in general terms the younger you are the greater exposure you'll most likely have to equities (shares of companies listed on the stock exchange).

That's because according to modern investment theory, equities (over longer periods of time) deliver the highest returns. 

As you get older, these lifestages funds automatically reduce your risk exposure to equities and reinvest a higher overall proportion of your savings into more "conservative" investments, like cash and bonds. The thinking is that the closer you get to retirement age, the less risk you'll want to take with your hard-earning savings if the market had a major meltdown, as it did in 2008.

The huge range of funds on the market (there are in the neighbourhood of 200) can be rather intimidating especially for a first time investor. 

When I first enrolled in KiwiSaver, I opted for one of these lifestages funds myself because I simply didn't have the time or energy to research the full range of offerings on the market. I subsequently ended up shifting because I was unimpressed with the results and my provider who had really poor communication. But that's another story... If you're really interested to hear it, you can read the juicy details here.

While many fund managers stand by the age/risk tolerance theory, there is growing opinion that the old rules and trends upon which asset allocation is structured no longer apply. Also, with people living longer than ever, cash funds delivering negative real returns just won't cut the mustard, or buy bread, for seniors expected to live into their '90s.

I'm not a financial adviser so I can't tell you what to do. Under the new rules,  only an authorised financial adviser whose services you have officially engaged can do that.

What I would encourage you to do before you chose one of these funds is to schedule an appointment with the provider (go in in person) and get one of their authorised financial adviser to break everything down for you. Find how what's in these individual lifestages funds, how well they have performed since KiwiSaver's inception, and how it would work with your individual circumstances.

If you are planning on using KiwiSaver as a platform from which to make a first-time home purchase, it could be that one of these lifestages funds doesn't make sense. Also, it could be that you don't have any appetite for risk or else a high appetite for risk and that the general profiling upon which these lifestages funds are constructed doesn't really meet your needs.

It's all a bit overwhelming but given that KiwiSaver could be your main retirement savings vehicle, the sooner you get a handle on how it all works, what you are invested in, and whose managing your money the better.

Neutral advice

An independent financial adviser will also be able to give you some neutral advice and look at your global circumstances to determine which KiwiSaver fund would best suit you.

But going back to your original question, we have a list of the lifestages funds listed on our website under our KiwiSaver section viewable here.

What you'll also find listed beside them is something called the growth asset percentage (GAP), expense ratio and performance, one, two and three year.

In case you are not familiar with these terms I'll explain briefly.

The GAP is our in-house way of expressing how much exposure a particular fund has to high risk assets. The higher the number the greater the potential volatility.  The older you get the less risk you'll want to be taking with your fund because of the likelihood of needing that money. 

The expense ratio is what we calculate as the relative cost of all the fees and expenses you'll pay to have your fund managed. Typically, the higher the GAP, the higher the expense ratio because in theory you are paying someone skilled to manage that risk and minimise your prospects of losing money.

KiwiSaver writer Mary Holm is big on fees and suggests they should be one of the main criteria for choosing a KiwiSaver fund. Just as your funds grow exponentially over time, so too do fees, which is easy to forget sometimes.  It's important to bear that in mind as part of any decision on which KiwiSaver to invest in. (To see how much you can end up paying in fees over a life-time of invested check out this fees calculator on sorted.org.nz)

And finally performance. Performance is hugely controversial in KiwiSaver because as yet there are no universal reporting standards to ensure a level playing field among providers. That should change next year when new rules regarding KiwiSaver are introduced with respect disclosure and reporting. 

In the meantime, you can get a general sense of how well your fund has done by comparing it to its peers, using the same reporting time frame as a measure.  On our performance ranking tables here, we have one, two and three year annualised returns, after fees but before tax.

If you look at our one year results, that's the 12-month period taken from the most recent quarterly reports (ending June 30, 2011) then going back. Two years, would be two years from June 30, 2011 working back again, and the same with the three-year.

Depending on what time frame you choose, the results can be dramatically different. That's because, how your fund will have performed depends to a high degree on what the markets did that past year. You'll be well aware of the market rollercoaster since KiwiSaver was first launched in 2007.

Fund managers have different styles and different thoughts on performance benchmarking and how to read it but again as a general rule, the longer the fund has to run, the more can be gleaned from how it is tracking and how your fund manager is performing. (See also our investment management 101 series by Kevin Mitchelson).

For more KiwiSaver fun, check our retirement calculator here . It'll give a better sense of how variable your nestegg is depending on the various factors discussed above. 

All useful information and resources to bear in mind as you move along in your KiwiSaver journey.