Amanda Morrall talks to Morningstar's Chris Douglas about the research firm's new KiwiSaver research, its ranking system and why gold and silver status eluded the pack

By Amanda Morrall

Only three out of eight KiwiSaver providers under review by Morningstar received a positive rating from the research house in its analysis of new retirement funds under management.

Under its grading system, default providers Mercer and OnePath, as well as Westpac were awarded a bronze ranking, missing out on a higher possible gold and silver medal ranking.

ASB, AXA, Fisher Funds, and Tower all received a neutral status, while AMP received an "under review" label pending the completion of a merger between AXA and AMP.

Chris Douglas, co-head of research for Morningstar New Zealand, said the funds were scored on a five pillar system: people, process, parent, price and performance.

"The process we're following here is looking at establishing qualitative research on KiwiSaver funds. We already do it on managed funds in New Zealand; looking at domestic fund managers, fixed interest fund managers, global equity and the like so we've rolled that out into KiwiSaver.''

Volatility a contributor to bronze rankings

Douglas said it wasn't all that surprising that providers didn't score any higher than bronze given the volatility the sector has experienced since inception. (For a full explanation of Morningstar's rating system click here).

"When you look at KiwiSaver over the last four years, there's been a tremendous amount of change that's happened in the industry. In virtually all the cases, there's been significant changes to the investment personnel  running the funds. There's been process changes, corporate changes and corporate disruptions and this has all impacted on our overall view of the schemes.''

Douglas said Morningstar's view of KiwiSaver was that it was still very much a "work in progress.''

"We think a lot has been done... and we're very positive about the future."

For the time being, investors who want full access to the research to the 47 individual funds reviewed by Morningstar will have to go through a financial advisor who has a relationship with Morningstar. Douglas said it was possible limited information would be made public next year.

Why's Fisher a neutral?

Asked to explain why the boutique provider Fisher Funds (whose growth fund has produced some of the best returns in KiwiSaver since inception) only rated as neutral, Douglas said it was primarily on the basis of its team.

"For us Fisher has never had the asset allocation experience. What they put together is a perfectly solid and valid KiwiSaver proposition but at the same time when you're looking at asset allocation the expertise hasn't been quite as strong as the other providers.''

Douglas said that was changing given the recent hiring of former Brook Asset Management managing director Mark Brighouse as chief investment officer.

"We expect to see some changes in those funds going forward.''

AMP review

With respect to AMP being put under review, Douglas said there were two concerns; the AMP/AXA merger (the details of which are still being worked out) and also an exposure to an unlisted property holding which has been losing money.

"It's an illiquid holding and in some of the funds it's quite a substantial allocation. There's some barriers as to how that's going to work out and we still need to get answers around how we're to get that merger when they bring AMP funds into AXA mix. We're hoping to get some more guidance from AMP in the coming months and we'll be updating reports as that happens.''

In light of these issues, Morningstar's recommendation for first time investors looking at AMP is to hold off.

"So anyone who is following our research, we're saying to new clients that we don't advocate new money flowing into these funds at this stage. And for those already in there, there's enough reasons to stay where you are for now, and see what changes will be announced from AMP, then you can make a decision,'' said Douglas.

"There is no need to rush a decision and there's certainly no need to sell these funds if you're invested in the AMP KiwiSaver scheme,'' he added.

Douglas emphasised the objectivity of Morningstar's evaluation noting they do not have a pay for review model.

"So there's been no money exchanged for these reviews that Morningstar has done.''

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