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Research shows KiwiSaver investors are irrational in chasing non-recurring past returns and accepting higher fees

Research shows KiwiSaver investors are irrational in chasing non-recurring past returns and accepting higher fees
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By Craig Simpson

KiwiSaver investors can be irrational by pursuing past returns and accepting higher fees, according to a research report examining KiwiSaver behaviour and funds flow trends.

The report is by Callum Thomas and Massey University's director of financial planning Claire Matthews, and was presented at the 2013 New Zealand Capital Markets symposium.

Some of the findings relating to investors displaying irrational behaviour could be explained by "investor consciousness", Thomas and Matthews said. The concept of "investor consciousness" is introduced by the authors in order to reconcile the relevance of variables other than fees and performance. They also suggest bank ownership is not an advantage for KiwiSaver providers.

In a market with low investor consciousness, investors’ decisions are driven by structural features, advertising and sales efforts.  By contrast, a market with high investor consciousness will see investors’ decisions driven by performance and fees.

A core theoretical hypothesis of the study is that investors react positively to performance and negatively to fees. 

However, with the overlay of the investor consciousness concept, the hypotheses are altered to an expectation that these core theoretical hypotheses will not hold given the immaturity of the KiwiSaver market in New Zealand.

Hypotheses and results summary:

  • Investors are chasing performance, with a positive relation between performance and fund flows, and between performance and member flows is supported by the data. However, there was also a positive relation between performance and outflows, which is unexpected and needs further investigation.
  • Investors wish to avoid high fees and expenses is again supported by the data and there is a negative relation between fees and fund flows and between fees and member flows.
  • There is generally a negative relationship between default status and fund/member inflows according to the data. 
  • Bank ownership is not an advantage for a KiwiSaver provider which is contrary to expectations. The reason why bank ownership should be seen as a negative is unclear, and counters previous research that suggested KiwiSaver members saw bank ownership as desirable. One possible explanation could be that banks engage in aggressive cross-selling, which may have resulted in some unsatisfied members. Another possible explanation is that the visibility of a member’s KiwiSaver balance, via their usual internet banking page, may have invoked attention effects, which spurred the member to more actively manage their account (i.e.. take a more active approach and attitude to selecting their provider).
  • Fund and member flows are influenced by the size of the fund and quantity of funds under management (FUM). A positive relationship was expected but the results of the study were inconclusive. The only significant relation found was a negative relation between the total FUM and the out flow of funds, which was the opposite to what was expected.

No surprise

The concept that investors chase performance and try to avoid fees should not be a surprise to anyone.

Prior to conducting this latest research the general perception was that members preferred to have their KiwiSaver and day-to-day banking with one bank, however the findings suggest this is in fact not necessarily the case.

I was surprised, as will many in the financial services industry, that bank ownership was not an advantage in KiwiSaver.

Marketing your KiwiSaver on the basis that you can see the account balance alongside your other day-to-day accounts is not as compelling as some would suggest and is certainly not a sound basis upon which you make an investment decision.

Many providers with multiple sales channels (e.g. insurance companies and banks) will be aggressively cross selling and I can understand how this will be a detractor for those who know what they want and are financially astute.

Another possible explanation offered to explain why banks do not have the distinct advantage is that customers are taking a more active interest in their KiwiSaver accounts once they can see the balances appear on their internet banking portal.

This convenience could be a double-edged sword as bank customers do not show the same degree of loyalty they once did.

KiwiSaver switching behaviour simply staggering

The suggestion that banks are aggressively cross-selling and this could be putting off some customers appears supported in comments made by Fidelity Life CEO Milton Jennings recently.

In an article written by David Maida for financialalert (a financial services industry website), Jennings was quoted as saying while KiwiSaver is going well for them he was concerned about the level of churn.

He also says "we're still seeing a lot of movement between providers which is not very good from our point of view" and he  cites evidence that savers are transferring between providers three or four times a year.

What KiwiSaver investors may not be aware of is that with a large number of providers there are entry, exit and switching fees. The level of these fees varies across scheme providers. Details of the various fee structures for specific KiwiSaver providers can be found here. For details on how the various KiwiSaver providers stack up against one another this can be viewed here.

“Customers go to a bank for a home loan or something and they sign a bunch of papers at the same time, only to find they've just placed their KiwiSaver account with that bank as well. We come across a lot of times when people don't realise that they've been shifted to a bank and are surprised that that's happened." Jennings says.

I personally have not seen or heard of evidence of savers being switched into a bank KiwiSaver scheme in the manner suggested by Jennings. If this were in fact the case then surely complaints would be made and the Financial Markets Authority (FMA) would be issuing proceedings against the offenders.

If investors are switching as many times as is being indicated above, this is simply staggering and displays how fickle and financially illiterate some KiwiSaver investors actually are. 

The additional fees incurred through constant entry, exit and/or switching would almost certainly negate a large portion of any potential gains that could be made over such as short period of time.

You really do have to question whether after nearly six years there is sufficient evidence to suggest switching from an existing provider to the current hottest trend-setter based solely on performance (or the fact you can access all your accounts under one-roof) is the smartest strategy. 

Some of the findings of the report re-iterates the low level of financial literacy in New Zealand.  

Thomas and Matthews’ concluding thoughts

The findings of the study were broadly in line with expectations and as the market develops, theory suggests the relations of performance and fees with flows of funds and members should grow in strength and importance, provided investor consciousness also grows and develops through time.  

Total expense ratios have tracked downwards, while average FUM per member has grown steadily with several providers reporting average FUM per member in excess of $10,000.

There has also been a degree of switching activity between KiwiSaver providers. However, there are several areas in the study where the results were less than satisfying (i.e. they were unclear, inconsistent, or statistically insignificant), and this provides an opportunity for future research in this area.

Future studies may benefit from introducing additional variables and observations to gain greater insight into KiwiSaver investor behaviour from a quantitative perspective. 

An alternative would be to take a fund-by-fund approach, if the necessary data is available. Overtime the data set will grow, which will also allow for further analysis.

 In terms of specific findings from this study, it would be useful to explore the data further to try to understand the existence of the unexpected positive relation between performance and outflows. 

Similarly, it would be helpful to understand the negative effect of bank ownership, given its contrast with members’ reported views on bank ownership.

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Is there any evidence here that fund managers are more rational than individuals


The most active KiwiSaver providers have been the Banks.   If ASB gains a new member at the expense of Westpac, then down the road ANZ are taking one off ASB, and just around the corner, Westpac are gaining one off ANZ and so on.    In the main, the banks are trying to attract brand new members through branch activity -  but if the customer is in KiwiSaver already, they are 50% likely to be already with another bank.  

Other than the banks, there are no other providers actively enrolling KiwiSaver members on the same scale.   I think that's why there is so much to and fro between bank schemes because they are the ones doing the activity.  

When non-bank providers voice concern over bank "churn", it's a bit like complaining about the wetness of the sea.  The banks have the resources.     Any provider with 2,000 people working for them, who willingly spoke to dozens of different people every day, you bet they'd do well too. 

But, outside of the banks, those other providers directly employ only a couple of hundred people at the most and they don't do the sales.    Their distributors are not employees and can do what they like. 

In summary, I think this activity in the banking sector is the main reason.   Knowledge of comparative  fee levels and comparative fund performance stats is still at a very low level.    And personally, I think online balances are a 100% Good Thing.


Hey, some funds are doing 2-3x better than others over a 5 year period,with no more volatility than lower return providers; why not change providers?

The old provider is no more likely to suddenly improve than the better ones are to suddenly get worse.

Past performance over a long period may well be a predictor of relative future performance, and with nothing much else to guide you apart from marketing and perceived values surely past performance over 5 years is better than nothing as a guide.


Really?  Which funds are these?