Double shot interview: Amanda Morrall talks to Morningstar's Chris Douglas on why bad markets are good news for investors who hold the course

By Amanda Morrall

The latest share market sell-off may have KiwiSavers tied up in knots, but Morningstar's Chris Douglas has a more sanguine outlook.

Despite the short-term noise over the Greek bail-out situation, the sovereign debt crisis in Europe and how the U.S. Federal Reserve are going to manage a $US14 trillion problem, KiwiSavers will march right through it all. They have no other choice.

The upside of  the downside of the markets is that KiwiSavers, as regular savers, will pick up some good bargains left behind by short-sighted or perhaps short-term investors who are bailing.

Douglas won't deny the situation is unsettling, particularly for retirement age investors who have less time to ride out of the volatility, but as the majority of KiwiSavers are those with decades to go before cashing in their chips, he believes a more relaxed approach is in order.

"At the moment, there is no doubt this market performance is going to be impacting KiwiSaver funds.We saw in August when we had a lot of volatility that the options that invested into more growth assets, they fell a lot more than the more conservative options. But that's exactly what you would expect. When people say to me what I should be doing?

As long as you are happy with your KiwiSaver provider, as long as you're in the right risk profile and you feel comfortable with where you are, stay the course, don't change anything.''

(See our KiwiSaver section here to find your fund).

'Stay calm. Carry on'

Even if they don't remain calm, KiwiSavers have no choice but to carry on. They're locked in until 65.

And yet many fund managers suggest far too many KiwiSavers remain invested in default funds or other funds that are either too conservative to meet their long-term needs in retirement, given the effects of inflation and tax over time. The suggestion has been made time and again, that those invested in default funds give their head a shake or else seek out professional advice.

"It's really important that people understand the erosion on their capital that inflation can have. The problem with some of the more income-oriented investments such as bonds and cash is they don't have much inflation protection. There's a few instruments where you can protect against the rise in inflation, however over the long term people need to understand that when they're saving for their retirement, the earning power they have today won't be the earning power they have in the future.''

In the present environment, with so much market instability and economic uncertainty, it may take a leap in faith for investors to buy that line. After all, in the past four years, the average performance of default funds, has exceeded that of the so-called growth funds or aggressive ones top heavy with equities.

"If you're looking at it from a price to price performance metric, many of the conservative options such as the default funds have been the best performance funds on the League Tables, but with KiwiSaver -- because investors are drip feeding incrementally into the markets, because they are systemically buying during times of volatility -- you find that the real return they'll receive, after all these cash flows it's been better to invest into some of growth-oriented options because they buying at more depressed prices and they're able to get the  upswing's when they happen.''

'Go for growth?'

While growth funds took it hardest in 2008 during the global financial crisis, they are some huge rebounds and that's despite how far they'd fallen, he said.

"I think it's important to look at 2009, 2010, investors in the more growth oriented options were able to generate some very strong returns. So whilst yes the default options have been performing strongly and in many way they are perfectly suited for a number of investors, if you have a longer term horizon, if you are willing to stomach some of the volatility that comes from the markets ebbing and flowing and the volatility that we see over the last few months, you should be able to expect a higher return from some of the more aggressive or growth like options.''

Morningstar has decided to intensify its focus on KiwiSaver funds analysing the top six providers by funds under management plus Fisher Funds and Westpac.

"They've all got reasonably stable teams and they've also got processes that are reasonably conservative. They are making sure that what they are doing is backed by a time-tested approach. They're not going out there and making investments into any kind of structured credit, any sophisticated, illiquid and non-transparent security. It's pretty vanilla. They are investing in equities, fixed income, a bit of property and cash, and by and large they are doing more than a suitable job in that place.''

Douglas said it's around the fringes where fund managers strategies differ.

"For example, we've seen some fund managers only invest in global listed properties whereas some fund managers won't even invest in New Zealand listed property and they have very difference performance characteristics."

Currency hedging was another point of difference, one that Morningstar plans to study more closely and offer investors guidance on as to the impact on performance.

"If you don't have any currency hedging for offshore equity assets, that can have a big impact on returns and likewise if you're fully hedged it has a big impact on returns."

(See our KiwiSaver section here to find your fund).