By Roger J Kerr
KiwiSaver investors who have their money managed under default scheme managed by ASB Group Investments/Sovereign (FirstChoice KiwiSaver Scheme) should be asking some hard questions about the management of their money.
A recent Sunday Star Times article (11 December 2011) by financial reporter Rob Stock highlighted that FirstChoice had $376 million of their Cash Fund invested in bank deposits with their own parent bank ASB Bank. Rob found it difficult to get full information on the managed funds and when I attempted to take a look at FirstChoice’s investment statement on the website the document failed to open.
As total Cash Fund investments in all KiwiSaver schemes are $3.4 billion, it is hard to imagine FirstChoice’s Cash Fund being much larger than $600 or $700 million.
Therefore, it appears that over 50% of the First Choice Cash Fund is invested with one counterparty bank (the parent ASB Bank).
Any cash investment portfolio should have a maximum limit of no more than 10% or 15% exposed to one counterparty at any one point in time, to prudently manage and spread credit risk.
You would think a bank should know something about credit risk.
Apart from a totally inappropriate credit risk position, FirstChoice’s returns on their Cash Fund are pathetic at 2.70% for the last 12 months and 3.10% for the last three years.
By definition, cash investments must mature within 12 months (both interest rate re-set and legal maturity date to get your money back).
FirstChoice appear particularly lazy in just placing the funds on deposit with their parent bank, instead of investing in a range of securities from Commercial Paper to other fixed interest securities maturing within 12 months.
Recent credit rating downgrades for the Australasian banks should have decreased the dollar amounts of maximum credit limits for individual bank names in these KiwiSaver Cash Funds.
* Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com