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

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).

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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16 Comments

As always, this advice is useless. What if I'm in the Growth option but I'm 63? What should I do? What if I'm in the Cash or Conservative Option - would now be a good time to switch to Growth, or not? What if my kiwisaver is 10% exposed to Australasian property and I think it's going to tank?

The best advice for any investor is to choose a Kiwisaver option which gives you peace of mind . Regardless of your age , pick the areas you feel some comfort with .

..... don't try and guess the markets , they make fools of most prognosticators over shorter time periods .

For you personally , at 63 ... you still have 2 decades ( hopefully more ) ahead , based on average life-spans . And as Wolly correctly points out , inflation will gobble up the spending power of conservative cash based investments .

Equity investments generally rise up with inflation , over the longer term ..... but both property & shares can be highly volatile in short periods . The entire US housing market is 30 % down from its high point , and in some cities , 50 % down .

Overall I'd say that Chris Douglas has given excellent advice during the interview . He didn't tell you that investing would be painless , did he ?

I cant see such a thing myself....

Inflation.....if you believe Wolly....for myself I believe the deflation and depression camp....so cash is king and worth more every day....at least uuntil we hit to bottom.....

US housing hasnt bottomed yet....50% down and heading down....

Investment painless? no.....

regards

Personally, I chose the Cash Only fund. At least it can't go backwards.

Also now on a Kiwisaver Holiday for 2 years  - mortgage repayment of higher priority.

Yes it can and does Mortgage belt...English and Bollard are debasing your cash at 30% plus every decade....

As for the utter rubbish about Kiwisavers being somehow safe because they are locked into a falling market....oh dear what can one say.....

Mind boggling garbage.

The market into which the Kiwisaver and taxpayer loot was and is invested, was being porked by Bernanke....it was a bubble of hot air and hope....reality is a very bloody long period of recession level activity across the world as the defaults, haircuts, boondoggle political bullshit and govt approved corruption in the banking system works it's way to the other side of the chasm...the filthy rich liars will get there first..the peasants and Kiwisaver prisoners will be left in the shit.

The fund managers will collect everytime they trade...using your money...your taxes....suckers.

Well 5 or 6 years of 10% deflation will make you smile then.....of course the 25%+ un-employment wont...

regards

Take it easy Wolly, don't get too wound up, it's not healthy

True enuff muzza...at least I didn't buy the Kiwisaver loopy deal...still paying taxes to support the dumb pork offering. I seriously think the vast bulk of peasants do not have a bloody clue what's going on.

"I seriously think the vast bulk of peasants do not have a bloody clue what's going on"

Yep and I think your jsut as much in amongst the sheepies myself....

regards

Clueless....

regards

My friend is a car salesman and he tells me we should all invest in cars, because when you reach retirement age they will be vintage cars and worth lots of money. Of course those retiring shortly will just have to take a loss, and that is unfortunate. Yes, put all of kiwisaver into cars, yipee and we'll all end up rich.

The good thing about being a peasant is that you get to meet lots of people and  have relationships outside of the family.  The Queen is a marvellous because, against all odds, she has proved she is *not* an idiot, when she really should be.   This is why she is universally admired and respected.   William is also doing well because - blimey - another seemingly un-mad person has somehow got himself in there.    

I digress - I think KiwiSaver is tremendous.  I recently added up what I have put in myself, and then had a look at the balance.  The balance is about  3 x my own money in  4 years.  If  providers made this information easier to get, I think the widespread satisfaction with KiwiSaver might go through the roof !   From today's non-commital shrug to a slightly raised eyebrow and an "ah yeah?".   That's the Kiwi equivalent of dancing in the streets.

I am being a little sarky of course.  As are people who attempt to insult people en masse.  Let me make it clear, they can't be arsed to fathom what on earth it is you're on about.   It's not because they don't care, or don't have the intellectual chops, it's because, well, you have to be interesting.  

We all know people (almost always male) that mutter darkly about background conspiracies at the drop of a tin foil hat.   If pressed on the detail, they will corner you for hours.  And if you don't immediately become an adoring disciple, you are dismissed as a peasant, or a sheep.  Don't be one of them!  If non-one's listening, think of other ways to get your message across.

If they're not interested, it's all your fault.

It's interesting how these people all have the same philosophy

"Don't worry if you'r drowning because when you die you'll go to heaven and get your pot of gold"

The catch is, you have to drown to see if it is true

Sanguine could be the perfect adjective for someone who advises to invest into a downturn.   However I suspect that the source of his erubescent complexion may well be from the splatter of his financial victims' blood.

If you expect a downturn, cash is the only asset to hold, not fixed interest at ridiculous yields nor growth shares, nor commodities.

Switch to growth when the market has bottomed.

2009 might have been a bumper year for equities, but not if you bought them in 2007!

 

good advice

I'm not surprised Chris Douglas has a more sanguine outlook... he's using someones elses money.

Seriously, John Key says the worlkd markets are very dark, but you just get up that ladder and walk across no mans land into the stock market machine gun mincer.