Craig Simpson finds the KiwiSaver funds that are improving the most over the longer term; examines the strategies of some key managers

Craig Simpson finds the KiwiSaver funds that are improving the most over the longer term; examines the strategies of some key managers
Regular contributions change the way you should look at your KiwiSaver returns. Image sourced from Shutterstock.com

KiwiSaver funds that deliver consistently good long term returns deserve to be looked at closely.

But so should those funds that have a good track record and are producing improving returns.

The recent publication of KiwiSaver fund performance using our unique regular savings methodology can identify these standouts.

Investors should be wary of funds that have a solid long term track record but are falling away in their short term performance. This could signal shortcomings in either the strategy or the underlying investment selections. 

As everyone knows, "past performance is no indication of future returns", but funds with a good track record and are improving are worth noting.

This story highlights those funds.

Please don't misunderstand what this story is about. It is about the improvers, not necessarily those with the top long-term returns. If you want to see how all funds performed and are ranked, our September reviews of aggressive funds is heregrowth funds here, balanced funds here, moderate funds here, and conservative funds here.

Defining the criteria

We are looking at KiwiSaver funds here. Our monitoring started in April 2008, so in this analysis "long-term" means from then.

KiwiSaver investment needs to be assessed over the longer term. Chopping and changing chasing short term results is a fast way to waste your investment on switching fees. And short-term results can be volatile, so there is no reason why last year's returns will be the same next year.

Therefore, we regard 'recent returns' as those over the last three years.

While it is bad practice to switch incessantly based on very short fund performance, it is also not good to simply stick with a fund that is not among the best in class nor improving.

To address this issue, we have been looking at the best top quartile funds in each risk category, and sifting out those whose three year track record is better than their long-term track record.

These are the improvers.

The analysis

In the tables below we have identified those funds that have the biggest positive difference between their long -term regular savings track record and their three year track record.

Aggressive Funds      
Cumulative $
+ Cum net gains
Effective
= Ending Value
Effective
Variance
Since April 2008 X Y Z
contributions
after all tax, fees
cum return
in your account
last 3yr
last 3yrs - long run
to September 2014      
(EE,ER,Govt)
$
% p.a.
$
return % p.a.
 
Kiwi Wealth Growth Fund A G  
19,862
8,111 9.7%
27,973
17.3%
7.6%
ANZ OneAnswer Intl Share A A IE 19,862 9,660 11.1% 29,522 17.3% 6.2%
ANZ OneAnswer Intl Property A A P 19,862 8,679 10.2% 28,540 15.4% 5.2%
SmartKiwi Growth A A IE 19,862 5,948 7.5% 25,810 12.7% 5.2%
Fisher Funds TWO Equity A A IE 19,862 6,456 8.0%
26,318
13.0% 5.0%
-------------------            
 
 
 
Column X is interest.co.nz definition, column Y is Sorted's definition, column Z is Morningstar's definition  
A = Aggressive, AE = Australian Equities, G = GrowthIE = International Equities, P = Property  

KiwiWealth Growth Fund

They take a hands on active approach to managing the portfolio and try to capture above market returns in the most efficient manner and at the lowest possible cost. There is a total portfolio approach with a core portion of the portfolio delivering a market like risk and return profile and the remainder of the capital allocated to more sexy and dynamic positions.

To execute the strategy the manager uses combinations of directly held securities, derivatives, managed funds (unit trusts) and exchange traded funds (ETF's).

For example, the Vanguard MSCI EAFE ETF, which is the fund's largest holding as at 30 September, 2014 (as per the Quarterly Disclosure Statement), provides the manager with exposure to approximately 1,400 securities across Europe, Australasia and Far East and has a management fee of approximately 10 basis points per annum.

Other holdings also disclosed publicly include thematic, sector and style plays designed to capture those additional basis points of return for investors and again in the most efficient and at the lowest cost possible.

The recent performance of the KiwiWealth strategy suggests the team have been hitting some massive home runs with their dynamic portfolio positions.

The overall strategy and investment philosophy appeals, plus the total management expense ratio (MER) of 1.14% is below average which is another bonus for investors.       

ANZ OneAnswer International Shares

ANZ NZ Investments ("ANZ") has overall responsibility for the portfolio and adopts a multi-manager style designed to deliver sustainable long-term growth for investors.

ANZ's approach is to not try and manage a stable of global equities from NZ but rather appoint well resourced and top performing global managers to manage their clients' money. ANZ believes to be successful in managing global equities analysts need to be visiting companies, meeting company management, talking to suppliers, visiting competitors and meeting customers in order to understand each business. To do this from New Zealand is not a viable solution in their opinion.

The following managers have been appointed to sub-manage the OneAnswer International Share Fund.

  • The Franklin Equity Group (“Franklin”). Franklin aims to invest in quality companies with the potential to produce sustainable earnings and cash flow growth. Franklin aims to select companies with above average earnings growth and therefore has a ‘growth’ style bias compared to the global equity universe. Approximately 25% of the International share fund is managed by Franklin.
  •  MFS Institutional Advisors Inc. (“MFSI”). MFSI aims to invest in quality companies with sustainable, above-average growth and returns.  MFSI has a ‘Growth at a Reasonable Price (GARP) / core’ style. Just over 40% of the current fund is invested in the core style adopted by MFS with the other funds blended around this investment to extract additional returns.
  • Vontobel Asset Management Inc (“Vontobel”)1. Vontobel aims to invest in sensibly priced high quality companies that can grow their earnings faster than the market on a sustainable basis.  Vontobel has a ‘Growth at a Reasonable Price(GARP) / core’ style. While this is similar to MFS, Vontobel manages approximately 15% of the fund on behalf of ANZ.
  • LSV Asset Management (“LSV”).  LSV aims to invest in out-of-favour or undervalued stocks that have the potential for near-term appreciation. LSV’s style is characterised as ‘value’ compared to the global equity universe. Currently LSV is allocated approximately 20% of the entire International share fund on behalf of ANZ.

Overall the International Share Fund has a growth bias. Recent performance indicates the choice of managers and allocation of funds across each manager is spot on.

The overall strategy while being quite different to that of KiwiWealth, it does highlight there is more than one way to perform in the aggressive KiwiSaver space. ANZ's MER at 1.09% is marginally better than KiwiWealth's and again below industry average.

Growth Funds      
Cumulative $
+ Cum net gains
Effective
= Ending Value
Effective
Variance
Since April 2008 X Y Z
contributions
after all tax, fees
cum return
in your account
last 3yr
last 3yrs - long run
to September 2014      
(EE,ER,Govt)
$
% p.a.
$
return % p.a.
 
Fidelity Growth G G G 19,862 6,098 7.6% 25,960 11.0% 3.4%
Aon Russell LifePoints Growth G G G 19,862 8,599 10.1% 28,461 13.2% 3.1%
Fisher Funds TWO Growth G G G 19,862 6,977 8.5% 26,839 11.6% 3.1%
ANZ OneAnswer Balanced Growth G B B 19,862 8,257 9.8% 28,119 12.7% 2.9%
ANZ Balanced Growth G G G 19,862 8,136 9.7% 27,998 12.6% 2.9%
-------------------                  
Column X is interest.co.nz definition, column Y is Sorted's definition, column Z is Morningstar's definition    
G = Growth, B = Balanced, A = Aggressive          

Fidelity Growth

This fund is no longer available for new investors and ceased to operate on November 19. No further analysis for the Fidelity funds can be provided.

Aon Russell LifePoints Growth Fund

Aon is the administrator for this portfolio with the investment strategy provided by Russell Investments, a global investment consulting company. Russell adopts a multi-asset investment process which means investors gain exposure to a globally diverse mix of asset classes and investment styles in a single investment portfolio.

Multi-asset investing may combine traditional securities, such as equities and bonds, with non-traditional approaches, such as alternative investments. Russell, like many KiwiSaver schemes, appoint sub-managers to execute the underlying strategy. The investment universe of investment managers Russell has access to is over 15,000 and from this universe, through a process of screening and analysis, Russell chooses 16 managers to work with for NZ investors.

Included in the current mix are NZ based managers Harbour Asset Management. Other managers Russell has access to and may use within the strategies are:

Sanders Capital MFS International U.K. Delaware Investment Advisers Harris Associates Wellington Management
Numeric Investors Russell Implementation Services Colchester Global Investors Brookfield Investment Management Loomis Sayles
PIMCO Australia Strategic Fixed Income Russell Investments Genesis Alliance Bernstein
Harding Loevner Oaktree Capital Westwood UBS  
 

Fisher Funds TWO Growth Fund

This portfolio was previously known as the Tower KiwiSaver Growth Fund before being taken over by Fisher Funds and rebranded.

The investment policy for this fund states the manager will invest in other managed funds that provide exposure predominantly to a range of growth assets (property and trans Tasman and international shares) and limited exposure to income assets (fixed interest and cash). At the discretion of Fisher Funds the Growth Fund may also invest in alternative assets and/or derivatives.

The asset allocation for the Fisher Funds TWO portfolio differs considerably from the "in-house" Fisher Growth Fund which many readers will already be familiar with. In the investment statement dated July 2014 the manager notes the asset allocation for the Fisher Funds TWO Growth Fund is under review and will change.

Looking at the Periodic Disclosure Statements on the Fisher Funds TWO website and comparing the March 2014 to September 2014 Growth Fund disclosure statements, no changes to the target asset allocation appear to have been recorded and there are just some minor position changes within the actual asset allocations as at 31 March and 30 September.

Fisher Funds has the following investment approach depending upon the risk and return profile of the investments.

  • Growth investments - favour successful growing companies, seek quality and the best ideas are the largest holdings.
  • Property & Infrastructure - top down approach looking for strong and reliable cashflows and seeking long-term superior returns.
  • Income investments - focus on absolute return strategy with a global perspective. Analysis begins with an examination of global economic trends and once country and industry preferences have been decided the detailed, company analysis begins.

Fisher's adopt a STEEPP analysis model which is unique to them and looks at the strength of the business (S), track record of the company (T), earnings history (E), future earnings growth (E), people and management (P) & price/valuation metrics (P). This analysis gives each company a score against a number of criteria that the manager believes needs to exist in a successful portfolio company. Every company gets a score out of five for each of the criteria and is ranked according to their overall scores. 

Balanced Funds      
Cumulative $
+ Cum net gains
Effective
= Ending Value
Effective
Variance
Since April 2008 X Y Z
contributions
after all tax, fees
cum return
in your account
last 3yr
last 3yrs - long run
to September 2014      
(EE,ER,Govt)
$
% p.a.
$
return % p.a.
 
Kiwi Wealth Balanced Fund B B B
$19,862
$6,646
8.2%
$26,508
12.0% 3.8%
Aon Tyndall Balanced B G G
$19,862
$6,624 8.2% $26,486 10.4% 2.3%
AMP Tyndall Balanced B G G
$19,862
$7,004 8.6% $26,866 10.8% 2.2%
Fidelity Balanced B B B
$19,862
$5,580 7.1% $25,442 9.2% 2.2%
Fidelity Ethical B B B
$19,862
$6,591
8.14%
$26,453
10.16% 2.0%
-------------------                  
Column X is interest.co.nz definition, column Y is Sorted's definition, column Z is Morningstar's definition    
G = Growth, B = Balanced          

Aon Tyndall and AMP Tyndall Balanced Fund

These two funds are managed to the same asset allocation and use the Nikko Asset Management ("Nikko AM") Wholesale Balanced Fund. Any differences in performance and asset allocation is attributed to fees and timing. Nikko AM believes that focused active management does add value, and they seek to achieve above market returns through a rigorous investment processes which focuses on both return and risk.

Nikko reviews the benchmark asset allocation annually (currently in progress). Nikko AM adopts an absolute return strategy and operates within the asset allocation guidelines below. The flexible mandate allows the manager to move across various markets, regions and sectors without being hamstrung by having to have an exposure to asset classes (or markets) they do not believe will perform in either the short or long-term. The separate allocation to alternative assets is also something that sets Nikko AM apart from their competitors.

  • Alternatives: 0 – 20%
  • Growth assets: 45 – 65%
  • Income assets: 35 – 55%

Asset weightings are reweighted back to the benchmark automatically whenever any asset class weight moves more than +/- 5% from its benchmark weight.

The New Zealand asset classes are managed by Nikko’s Auckland based equity and fixed interest teams, while the offshore sectors are outsourced to global managers who are sector specific specialists. The absolute return focus allows the manager the flexibility to invest into markets they see as offering the best value and potential. Many of the KiwiSaver asset allocation and target ranges are quite restrictive and dictate which sectors the manager must have exposure to and within what range. 

The global managers engaged by Nikko are:

  • Global Fixed Income: Goldman Sachs Asset Management.
  • Multi Strategy Fund: JP Morgan Alternative Asset Management.
  • Global Equities: Davis Advisors, Epoch, Principal Global Investors and WCM.

The fund itself does not hold any securities directly and does not have a specific allocation to cash. 

----------------

For the record, here are the equivalent tables for the Moderate and Conservative risk categories. Variances are small and we have not analysed them.

Moderate Funds      
Cumulative $
+ Cum net gains
Effective
= Ending Value
Effective
Variance
Since April 2008 X Y Z
contributions
after all tax, fees
cum return
in your account
last 3yr
last 3yrs - long run
to September 2014      
(EE,ER,Govt)
$
% p.a.
$
return % p.a.
 
ANZ OneAnswer Conserv Bal M B M 19,862 5,941 7.5% 25,803 8.5% 1.0%
ANZ Conservative Balanced M B M 19,862 5,866 7.4% 25,728 8.4% 1.0%
AMP Moderate M B M 19,862 5,219 6.7% 25,081 7.5% 0.8%
ANZ Default Conserv Bal M B M 19,862 5,594 7.1% 25,456 7.7% 0.6%
Fidelity Conservative M C M 19,862 4,704 6.1% 24,566 6.6% 0.5%
-------------------                  
Column X is interest.co.nz definition, column Y is Sorted's definition, column Z is Morningstar's definition    
M = Moderate B = Balanced, C = Conservative      

 

Conservative Funds      
Cumulative $
+ Cum net gains
Effective
= Ending Value
Effective
Variance
Since April 2008 X Y Z
contributions
after all tax, fees
cum return
in your account
last 3yr
last 3yrs - long run
to September 2014      
(EE,ER,Govt)
$
% p.a.
$
return % p.a.
 
Lifestages Capital Stable       19,862 3,179 4.3% 23,041 5.1% 0.8%
AMP KiwiSaver Default Fund       19,862 4,121 5.4% 23,983 5.8% 0.4%
KiwiWealth Conservative       19,862 4,660 6% 24,522 6.4% 0.4%
Fidelity Capital Guaranteed       19,862 5,348 6.8% 25,210 6.9% 0.1%
Mercer Conservative Fund       19,862 4,442 5.8% 24,304 5.9% 0.1%
-------------------                  
Column X is interest.co.nz definition, column Y is Sorted's definition, column Z is Morningstar's definition    

 

For explanations about how we calculate our 'regular savings returns' and how we classify funds, see here and here.

The right fund type for you will depend on your tolerance for risk and importantly on you life stage. You should move only with appropriate advice and for a substantial reason.

Our September review of aggressive funds is here, growth funds here, balanced funds here, moderate funds here, and conservative funds here.

----------------

1. Vontobel and ANZ Global Wealth signed a Memorandum of Understanding (MoU) back in 2012. It needs to be made clear that this MoU is separate to any Investment Management Agreement that exists with ANZ NZ Investments Ltd and that ANZ has the ability to terminate the investment management agreement at short notice should the manager not meet expectations.

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?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

13 Comments

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Wow, the "aggresive" "Kiwi Wealth Growth Fund" charges me how much to place my money in a passive low-cost index tracker?  1.13%.  And this is on top of the 0.33% the ETF charges.
 
Talk about clipping the ticket.

Hmmm - I guess legitimate wealth transfer mechanisms are still alive and well - no level of regulatory oversight ion can contain the rapacity of the entitled.

For you that is somewhat irrelevant if the after-tax, after-fees return is better than their peers. If not, you may have to make some decisions. In your hands ...

some would consider the investment rot caused by excessive and/or layered come-what-may fees are indeed an issue.
the after tax after fee return is more like making the high fees the investors fault (well you were dumb enough to pay, so you don't deserve to keep/have your money) and often trotted out by industry types
few would bemoan generous fees against outstanding returns, however baking in high fees from the get go is obviously putting the manger/middle man/woman ahead of the investor and investment performance.
its the classic to serve v servicing thinking.
 

Fully agree-  we can only hope that a truly customer centric provider such as Vanguard sets up in the NZ market.
Charging 1% plus to "monitor" and invest in underlying managers should be illegal. Joe  punter doesn't understand such things so may need protecting.

Don't forget you are also paying for their active management and monitoring of those securities and the expertise associated with putting the portfolio together and blending the various securities to achieve the best possible result.
The 1.13% total management fee is low compared to what some actively managed growth funds charge inside KiwiSaver. Fees are an important consideration but they are not the be all and end all.

I never worked at a trading institution where slippage was not a major consideration in the return profile analysis. As they say look after the pennies and the pounds will look after themelves. Size basis trade profits are especially vulnerable to unmonitored slippage costs, where hedging forms part of the risk management profile.

QUOTE: As everyone knows, "past performance is no indication of future returns", but funds with a good track record and are improving are worth noting
 
Craig I suggest you read this statement over and over and consider its logic.
 
There are 4 things worth evaulating when looking at kiwisaver manager:
1. What are the true fees (including underlying managers)?
2. Is the asset allocation suitable for my risk tolerance?
3. Is the fund diversified across geographies, industries and asset classes?
4. Is the manager eithical and competant to implement their stated objectives?
 
Cheers

Are you implying therefore TraderX that you would never consider performance or the managers ability to add value on a risk adjusted basis.
Past performance is one of the quantitative factors that goes into any evaluation model alongside fees, asset allocation etc etc.
I doubt you would go into a fund that had all four attributes you note above and had lousy performance

Craig, can you point to any studies that show that investors can, in advance, determine which managers will outperfrom or "add value" in the future? i.e is picking historically out-performing managers a recipie for future out-perfomance? Especially on an after-fees basis.
Suggest you have a read of the below paper
https://pressroom.vanguard.com/content/nonindexed/Updated_The_Case_for_I...
Low cost, widely diversified, appropriate asset allocation for desired level of market risk, a competant (to implement startegy and administrate well) and ethical manger - these are the key things investors should be looking for.
 

Trader X, thanks for the link.
Very familiar with the Vanguard story having used them as part of high net worth client portfolios in a past portfolio management role for a large Private Bank.
I do disagree with your widely diversified theory as within an equity only portfolio, some studies show most of the risk in that portfolio can be removed simply from holding between 20 to 30 shares.
Holding a widely diversified portfolio can actually hurt your performance. The great fund manager Peter Lynch coined the phrase diworsification (see the book One up on Wall Street).
You may want to hunt down a paper titled Identifying Skilled Mutual Fund Managers by their Ability to Forecast Earnings by Jiang & Zheng (2014 draft on line)
As I am involved in managing of a concentrated portfolio of actively managed global equities I guess we will have to agree to disagree on a few things.
cheers
Craig

Thanks Craig - I will chase up your report and have a read.
It seems though that the evidence from Nobel prize winning economists and researchers is that chasing out performance and trying to pick winners is a fools game.
Would it be unkind for me to suggest that as an active manager yourself you might be conflicted in this area? We do all have our own biases.

Conflicted...more than likely... but in saying that I have constructed and managed portfolio's on both sides using both passive and active approaches so have a bit of a unique background and some experiences to draw on. As you say we all have our own biases.
Academics will keep having the debate (just like you and I have been) for years to come and each will cite various bit of work over different time frames to prove a point.
Check out the research and studies on smart beta - that might be right up your alley and something I am looking at more closely but from an active perspective as opposed to passive.
Cheers
Craig