By Amanda Morrall
Whether you're going for growth in KiwiSaver or playing it safe with cash and bonds, it pays to know just who is handling your retirement savings and what their approach is to managing that money.
Fund management styles roughly delineate into two camps; active or passive, although the former is known by several terms including dynamic, value investing, momentum and alternative. (To read more on investing styles see our investment 101 series by Kevin Mitchelson here.)
In simple terms, actively managed funds are those which seek higher than average returns delivered by the market, whereas passively managed funds track the index. Which does better is a matter of ongoing debate.
Proponents of passively managed funds maintain the average active fund manager (taking into account the premium you typically pay in fees) can't deliver the promised returns.
Chris Douglas, co-head of research house Morningstar New Zealand, said the debate about which is better is never ending.
"It's a topical debate globally continually, and it's one where we're seeing a bit of divergence in KiwiSaver as well.''
While Douglas upholds the claim by passive managers that the average active manager can't do better than the index, the said the New Zealand context is unique. Here the average active fund manager can fairly take credit for outperforming the market, by making calls on it and restructuring portfolios accordingly.
To a large extent their success is owing to "inefficiencies" in the New Zealand market, Douglas argued, using Telecom as an example.
"It's been pretty easy for NZ fund managers to be short Telecom versus the index, and that's led to relative out performance versus the NZX50.''
For KiwiSavers invested in funds with a larger than average exposure to New Zealand equities that's been good news, adds Douglas.
Relative to other share markets world-wide, the NZX50 has stood up.
So does this resiliency bode better for passive or actively managed funds in the case of KiwiSaver?
'It's all about asset allocation'
Douglas believes the more important issue is asset allocation.
"The reality is that asset allocation is the key decision to make and that's not a passive decision.''
This belief is borne out in the divergence of performance between both passive and actively managed KiwiSaver funds over the past four years.
For example, while the average growth fund has over the past four years fallen -1.72% (after fees) some but not many have returned above 6%.
Aggressive funds (also actively managed) have fallen -2.88% according to Morningstar data trackers. See Morningstar chart below.
| Peer group averages | Assets ($m) | 4-year | Est. Total fee% | Additional fee $/year |
| Default options | 3,322.5 | 4.22 | 0.50 | $33.60 |
| Conservative | 3,919.1 | 4.25 | 0.67 | 33.60 |
| Moderate | 1,234.1 | 2.69 | 0.80 | 35.10 |
| Balanced | 1,622.9 | 0.67 | 0.88 | 36.00 |
| Growth | 1,401.2 | -1.72 | 0.92 | 34.20 |
| Aggressive | 659.6 | -2.88 | 0.99 | 34.20 |
While those KiwiSavers invested in higher risk growth and aggressive funds might bemoan their losses, Douglas suggests their relative losses aren't all that acute, given that global share markets fell by as much as 40% through the global financial crisis.
"It's a loss but it's not a bad result given the tremendous volatility in 2008. It highlights that it's been tough times but KiwiSaver funds have served them reasonably well.''
So what accounts for those above average returns in KiwiSaver and can active fund managers take credit for them?
Douglas said there were a number of factors driving the strong performance including relative strength of the New Zealand market and also currency hedging.
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