We review regular savings returns to December 31, 2014 for conservative & default KiwiSaver funds

We review regular savings returns to December 31, 2014 for conservative & default KiwiSaver funds
Regular contributions change the way you should look at your KiwiSaver returns. Image sourced from Shutterstock.com

Still in a default KiwiSaver fund?

Is that just because you have not got around to thinking about what to change to, and how to change?

Or do you think "they all return about the same"?

The long term track records of all funds are now available and it is clear how to compare that track record.

Default funds are producing returns that are weakening as time elapses. They share this unfortunate feature with Conservative funds.

Since inception, and on a regular savings basis, the average of the top five funds has produced compound annual returns of 6.25% p.a. But over the past three years, that return has been only 6.06%.

True, that is better than bank term deposits, but it is much weaker than Moderate, Growth or Aggressive KiwiSaver funds.

In contrast, Moderate, Growth and Aggressive funds have been improving as time elapses, especially over the past three years.

You give up a lot by being in a Default fund rather than a Moderate fund, even more by accepting more risk into the other types of funds.

On our regular savings basis, you would be better off by $2,118*. While that may not seem a lot based on your ending fund value of $31,178* it is very significant when you realise that $22,818 is what you, your employer and the Government contributed. The average Moderate fund earnings after-tax and after-fees is $2,118 more than the $6,242 you would have earned in a Default fund*. That's more than a third more!

The conservative and default funds are those found down the bottom of the risk spectrum and have greater allocations to fixed income and cash within their strategies.

The returns from this category are expected to have low and stable returns over time and the chances of losing capital in any one year will be reasonably small.

The default fund asset allocation is determined to a large degree by a mandate which is similar for all managers and is set by Government and their advisers.

There is a range for each asset class that managers can move within but essentially the differences between all nine default fund asset allocations should be within cooee of each other.

As new entrants into the KiwiSaver and/or Default classification there is minimal data for BNZ and insufficient data for Westpac, Kiwi Wealth and Grosvenor to be included in the performance table.

Across the default funds not a lot has changed in terms of rankings from the last summary of the category. ANZ and Mercer continue to be the stand-out performers.

BNZ's recent track record is impressive, however it is too early to tell if this short-term data can be used as a proxy for potential longer-term performance.

The average return across the default funds which have been going since April 2008 (excludes BNZ, Grosvenor, KiwiWealth and Westpac) has been 6.1% which is above the average of 3.8% for all the funds we have categorised as conservative under KiwiSaver. Our conservative categorisation also includes Cash funds and the return from this segment of the KiwiSaver universe.

Cash returns have averaged around 3% since April 2008 and the inclusion of these funds in the Conservative category has a substantial impact on the overall sector average. Excluding Cash funds from the equation the average Conservative sector return would rise to be approximately 5.4 . For the last three years the Default funds have returned on average 6.1%.

Over the shorter three year period a majority of the funds have exceeded their long run returns. Five funds have failed to better their long term numbers over the last three years namely: AON Russell Lifepoints Conservative which is ranked near the top of the table on long run returns; AMP Conservative Fund; Grosvenor Conservative Fund (Grosvenor are a newly appointed default fund manager); ANZ OneAnswer Conservative Fund and Craigs Conservative Fund.

Very few funds have managed to produce higher three year returns compared to the long-run numbers. The exceptions are KiwiWealth Conservative Fund, Lifestages Capital Stable Fund and AMP Default Fund. ANZ, KiwiWealth and Mercer are the stand-out performers over the past three years.

In a number of cases the lower short term returns can be explained by a combination of: 1) a lack of exposure to equities (which have performed remarkedly well); 2) capital losses incurred on bond investments due to increasing interest rates and 3) low (or negative) interest rates for Cash.

As expected all the cash funds appear at the bottom of the return table. The Staples Rodway Conservative Fund invests solely into cash and short term deposits and hence why this fund is found performing in line with cash funds in this sector.

Here are the full comparison as at December 31, 2014 for Conservative & Default Funds.

Default Funds
Cumulative $
contributions
(EE, ER, Govt)
+ Cum net gains
after all tax, fees
Effective
cum return
= Ending value
in your account
Effective
last 3 yr
return % p.a.
since April 2008
to December 2014
$
% p.a.
$
 
 
 
 
 
 
ANZ Default Conservative 22,218 7462 6.7% 29,680 6.7%
Mercer Conservative
22,218
7,077
6.4%
29,295
6.1%
Fisher Funds Two Cash Enhanced
22,218
6,775
6.1%
28,992
6.0%
ASB Conservative
22,218
6,691
6.0%
28,909
5.8%
AMP Default
22,218
6,205
5.6%
28,423
5.7%
BNZ Conservative
6,217
1,185
6.7%
7,402
n/a
Grosvenor Default Saver          
Kiwi Wealth Default          
Westpac Defensive          

For most default funds, the last three year's return are on a par with the lifetime returns and the long run returns are proving to be stable with low levels of volatility.

KiwiSaver default funds are only part a broader range of conservative funds available. Many of the 'traditional' Conservative and Cash funds are underperforming the Default funds. Here is the full list:

Conservative Funds
Cumulative $
contributions
(EE, ER, Govt)
+ Cum net gains
after all tax, fees
Effective
cum return
= Ending value
in your account
Effective
last 3 yr
return % p.a.
since April 2008
to December 2014
$
% p.a.
$
 
 
 
 
 
 
22,218
4,663
6.0%
24,525
2.8%
22,218
4,660
6.0%
24,522
6.4%
22,218
3,673
4.9%
23,535
4.0%
22,218
3,623
4.8%
23,485
2.9%
22,218
3,179
4.3%
23,041
5.1%
22,218
2,572
3.5%
22,434
2.9%
22,218
2,507
3.5%
22,369
2.8%
22,218
2,467
3.4%
22,328
2.6%
22,218
2,427
3.3%
22,289
2.6%
22,218
2,315
3.3%
22,177
2.7%
22,218
2,288
3.2%
22,150
2.8%
22,218
2,252
3.1%
22,114
2.8%
22,218
2,232
3.1%
22,094
2.6%
22,218
2,149
3.0%
22,011
2.6%
22,218
2,134
3.0%
21,996
2.5%
14,858
1,188
3.0%
16,046
1.6%
22,218
2,057
2.9%
21,919
2.5%
22,218
1,654
2.3%
21,516
2.0%

For those funds which have not been in existence for over three years their results are shown in the table below.

 

Conservative Funds
Cumulative $
contributions
(EE, ER,
Govt)
+ Cum net gains
after all tax, fees
Effective
cum return
= Ending value
in your account
Effective
last 3 yr
return % p.a.
since April 2008
to December 2014
$
% p.a.
$
 
 
 
 
 
 
Milford Conservative                      
7,317
2,695 13.8% 10,013 n/a
BNZ Cash 7,119 902 3.2% 6,217 n/a

In addition, savers interested in risk-protected returns should consider Westpac's capital 'guaranteed' funds.

These funds invest in equities but have a Capital Protection Plan is designed to give you the opportunity to earn the higher returns normally associated with growth assets without the risk of losing your initial contributed capital (other than through the insolvency of the Capital Protection Provider or a "tax change event"). The goal of generating higher returns is implemented by having as much of the CPP Fund as possible invested in growth assets.

However, the manager is also required to preserve the capital value of the Fund. It does this by reducing the amount invested in growth assets if the value of the assets of the CPP Fund falls below certain predetermined levels. Instead, some (or, if there is a very dramatic fall in the value of the growth assets, all) of the assets of the CPP Fund are placed in a form of deposit with the Capital Protection Provider that is designed to recover part of the value of the assets over time, but does not produce a positive investment return (these are sometimes called zero coupon bonds or deposits).

Westpac has five such plans, all starting at different times:

Capital protected
Cumulative $
contributions
(EE, ER,
Govt)
+ Cum net gains
after all tax, fees
Effective
cum return
= Ending value
in your account
Effective
last 3 yr
return % pa
since April 2008
to December 2014 $ % p.a. $
           
Westpac CP Plan No. 1 20,622 10,383 11.1% 31,005 15.0%
Westpac CP Plan No. 2 17,328 7,782 11.5% 25,110 14.9%
Westpac CP Plan No. 3 13,811 6,006 13.3% 19,817 14.9%
Westpac CP Plan No. 4 10,232 4,792 16.7% 15,024 n/a
Westpac CP Plan No. 5 7,097 3,270 20.6% 10,368 n/a

Don't jump into these types of funds unless you understand fully how they work in good times, and bad.

The following funds have not been going long enough to be included in the above table.

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

There are wide variances in returns since April 2008, and even in the past three years, and these should cause investors to review their KiwiSaver accounts especially if their funds are in the bottom third of the table.

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 December review of Moderate Funds is here.

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

* These numbers are the average of the top five funds

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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2 Comments

Important to note that this analysis only applies to the person taking their money out of KiwiSaver as at 1 January 2015.   Yep...they should have been in an aggressive fund - they would have got much more money.
For everyone else, who may have some decades to go, you haven't necessarily missed out if you are in a default fund.  
If the unit price goes backwards, so does the amount of money in the KiwiSaver fund.   The aggressive funds will not continue to grow at this rate - so those aggressive funds are the most likely to go backwards.   When they go backwards and start to lose money, the default funds may prove to be better in that tortoise-hare scenario that we all know and love.  
I know there are disclaimers ahoy about past performance being no guarantee etc - but I think writing like this gives the incorrect impression that default funds are a mug's game - based on only 7 years of past performance data.

When I joined KS back in err 2006 or so, I chose a conservative fund - I thought the market was overvalued and due for a correction. Turns out this didn't happen for another 3 years, but while balanced / growth / aggressive funds dived, conservative kept cruising along.
Turns out, my conservative fund has outperformed both balance and growth funds - unit price since inception is 1.95 vs 1.71 for balanced and 1.52 for growth (AXA ASPIRE, now part of AMP).
To be fair, i've missed out on some good returns in the last 3/4 years if I had have switched to balanced / growth after the GFC, but as they say - timing is everything. And if it were easy to time the markets, we'd all be rich.
IMO, markets are again overvalued and due for a correction, there's certainly plenty of uncertainty around the world with Greece, Europe, China, even the US. So I certainly won't be switching away from conservative any time soon. But each to their own I guess. Conventional wisdom - invest in growth when you're young, then wind back to conservative as you near retirement - is based on historic returns. Split Enz have some pretty good advice on this...