Morningstar's Chris Douglas talks to Amanda about the June quarter 2012 KiwiSaver results, total and net of tax returns for investors

Morningstar's Chris Douglas talks to Amanda about the June quarter 2012 KiwiSaver results, total and net of tax returns for investors

By Amanda Morrall

KiwiSavers invested in default funds since inception may be made to feel guilty for their choice, or more precisely their lack thereof, however their performance in the national savings scheme has been none the poorer for it.

Morningstar NZ, in its latest KiwiSaver report for the June quarter, shows that across a range of high to low risk funds offered by default provider ASB, performance differences have been negligible.

A hypothetical investor contributing 2% of their gross income, matched by their employer, invested since the inception of KiwiSaver would (taking into account the NZ$1,000 kick-start) have about NZ$15,740 in their accounts if they were in a conservative fund. That compares to NZ$15,701 if they were in a slightly higher risk "moderate" fund with ASB and NZ$14,932 if they were in ASB's growth fund, which has the highest exposure to the share market.

To profile the investor experience, Morningstar used in its calculations a median before tax salary of NZ$800 a week with 2% personal contributions and 2% employer. The starting point was Oct. 1, 2007. ASB was chosen because it is the largest provider in KiwiSaver currently.

Considering that share markets, in the time since KiwiSaver was launched, have suffered the most significant losses since the Great Depression, the differences across the range of funds is slight.

Chris Douglas, co-head of research for Morningstar NZ, said the finding should put performance obsessed KiwiSavers at ease because it shows that it's regular contributions, for the time being, have a greater impact than returns.

"In the early years of KiwiSaver it is all about being in a scheme and incrementally building up the nest egg. As the value of KiwiSaver grows, however, the risk profile decision will become increasingly important,'' Douglas notes in the report.

While the difference between the best and worst performing fund was only NZ$808, Douglas said the gap could expect to grow exponentially over time as balances built up putting greater importance on the type of fund investors were in. (To read more on how funds differ in KiwiSaver read this).

"Over the long-term we do expect that equities will outperform bonds but we also know that's not a given either. There will be some periods where bonds outperform equities otherwise it would just be an easy arbitrage that everyone could take advantage of.''

KiwiSaver Scheme Category Total return %pa Ending Value $NZ
ASB KiwiSaver Scheme's Conserv Multi-sector Default 4.64% $15,740
ASB KiwiSaver Scheme's Moderate Multi-Sector Moderate 3.10% $15,701
ASB KiwiSaver Scheme's Balanced Multi-Sector Balanced 1.05% $15,359
ASB KiwiSaver Scheme's Growth Multi-Sector Growth -1.11% $14,932

In general terms, 2012 so far has seen equities weighted funds take a beating. At the same time, those funds heavily weighted in cash (including AMP's default fund) have also wilted, said Douglas.

The quarter term result stand-outs were funds invested in New Zealand and international listed property.

"The NZ listed property market has done very well again," comments Douglas.

"It's up about 10% in the year to date and global listed property has done well too. So people are looking towards equity investments that have got more of an income oriented nature to them and listed property and securities certainly fit the bill there.''

Among the default providers themselves, OnePath emerged a winner. In the past year (ending June 2012), the fund has returned 6.6%, compared to an average of 4.8%. That's consistent with it's four year return of 6.1%. The second best performing default fund, also for the year ending June 2012, was Tower's enhanced cash fund which returned 5.4%.

AMP's default fund was the poorest performing of the default funds for this same time frame returning only 2.7%,  compared to the average of 4.8%.

Douglas said AMP's heavy exposure to cash has been a drag on its default fund. The research house, which regularly reviews and rates KiwiSaver providers, will be watching closely for any changes in asset allocation, said Douglas. He said other default providers and their funds have fared better because of a greater allocation of fixed interest assets.

"The reason they've (AMP) been in cash is they're worried about interest rates rising. We all know that when interest rates rise, the performance of fixed interest goes down inversely. AMP have been of the view that rising interest rates will be a drag and that hasn't proven the case as yet."

PIE report

In the new few weeks, Morningstar will also be releasing a one-off report on after tax performance in KiwiSaver, using the top PIE rate of 28%.

"It'll be interesting to see how it plays out,'' said Douglas.

While investors like to compare performance in KiwiSaver to term deposits, Douglas said any such comparisons needed to take into account the effects of tax.

"It's fair enough to compare the performance of any investment relative to what you get in the bank, which is why we continue to have a gross of tax performance survey because its very confusing if we start having after-tax returns over here and people comparing them to the bank, and all of a sudden its not apples versus apples."

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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