By Amanda Morrall
How is your KiwiSaver tracking, really?
Beyond the known contributions made by employees, employers and government contributions, actual gains and losses can be difficult to gauge.
That's because as yet there is no universal standard by which fund managers are obliged to report to investors (or researchers) how funds under their management have fared.
Existing performance tables, including interest.co.nz, rely on a point-to-point system where returns are calculated on the basis of a lump sum contribution and its movement up or down from year to year without consideration of cash-flow in the intervening months.
Applied to the KiwiSaver, it provides a misleading result, said Chris Douglas co-head of research for Morningstar.
"With KiwiSaver everyone starts with a zero account balance and then incrementally add their salary into the account, so cash flows actually do matter.''
To rectify the problem, Morningstar has devised a money-weighted model that takes into account the regular savings architecture of KiwiSaver called "investor returns.''
Douglas said the aim is to provide investors with a more meaningful gauge of how their KiwiSaver fund performs over time.
"By highlighting an investor return, which is a money weighted calculation we can provide investors with a bit more understanding of how people have used this fund and likewise managers can get to know people are using their funds as well and maybe counteract this buy and sell at the top of the market cycle.''
"When you see these contributions coming in they actually come in at quite opportune times,'' said Douglas, noting how lump sum contributions from Government have tended to coincide with market declines allowing investors to benefit from cheaper stock prices followed by a lift in the market.
Using ASB's conservative default fund as an example, Douglas said the investor experience is better than many might assume. Since inception the fund has recorded a total return (before fee and tax) of 2.55% whereas the investor returns are 4.8%. (For further explanation watch the video above).
"It's quite a marked difference,'' said Douglas.
With member tax credits set to be halved (if National is re-elected next month), Douglas said the difference will be reduced but still evident.
Investors who have a long way to go before retirement may be less concerned with investor returns than those who are bumping up against it.
That's because retirees or those close to it will be most impacted by major movements in the market, Douglas said.
"That's when people need to be very conscious about the type they're investing into, the risk profile they have to make sure there are no surprises within the performance that could adversely affect the money they have invested.''
Rather than getting too hung up on performance Douglas suggests KiwiSaver would do well to judge their provider by a whole host of measures including fees, communication and the track record of the fund manager.
That said, Douglas concedes performance invariably rates highest with investors, particularly those who find themselves at the extremes of the performance tables.
"Everyone is going to be very cynical with performance numbers that you see from a fund manager if it is at the bottom of a performance table or if it's at the top. You can't expect them to over time be one or the other. What we typically see is that funds have their moments in the sun where they do really really well and then they have periods where the suffer and they do very badly. Overtime you'd hope that they balance out and you get a pretty decent return.
"So it's important to understand performance characteristics but fees do count." (see our fee calculator here).
"Likewise make sure there's a stable investment team there. They have an identifiable track record in place. You want to see repeatable performance also a strong and robust parent.
"Finally one of the most important things in our assessment is transparency. If your KiwiSaver provider isn't talking to you, they're not telling you what's going on and providing you with the information that you want then I think you need to look elsewhere for an option that will."
1 Comments
This is a good move because the average KiwiSaver member's return is very different from what is reported, for all the reasons that Chris explains. We're still reporting on the basis of someone paying in a lump sum and seeing what happns.
What I don't understand is the notion of the Govt paying money in every six months. They used to pay the $40 fee rebate with this frequency, but that was panned ages ago and the member tax credits should only be paid once a year in July/August - depending on when your provider can get the money across.
I think this is a good, positive move though. It's the reason why balances look healthier than you'd think after looking at the published returns.
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