Long-term track records are one of the key investment selection criteria for many investors.
KiwiSaver has now been going for almost eight years and we are seeing a small group of fund managers and schemes developing market leading performances that will get attention.
Our 'regular savings' assessments confirm that investors who have been prepared to take on some risk and expose themselves to listed property and shares have been handsomely rewarded over that period.
Not only are we seeing excellent performances across the spectrum of risk profiles, more importantly there is a level of consistency by the top performers in each category.
We are also observing a trend of improving returns, both over the full period since April 2008 and the more recent 'last-three-year' period.
Also good to see is that some managers who were laggards now picking up their game, now achieving above average returns more recently. This is pushing through to their longer-term performance numbers.
At the other end of the return spectrum there are some clear laggards. We can't help but question the investment strategy and/or security selection for these managers as it is having a detrimental affect on their long-term returns.
Within the aggressive category for example there is close to 5% p.a. difference between the average of the top five and bottom five managers.
Our classification of where we believe a fund sits in terms of its underlying risk characteristics may be one reason for where a fund is positioned compared to its peers, but by and large we would suggest there is something fundamentally wrong with either the investment strategy, asset allocation, hedging policy and/or investment or sub-manager selection for a fund to be performing well below the leaders, especially where the leaders are delivering consistent results.
Fees and tax will also erode returns. However, there is not that much variance in membership or administration fees across KiwiSaver managers to explain some of the significant differences in performance.
Investors who are in any of the funds in the bottom quartile of our performance tables should be seriously reviewing their choice of fund and or scheme provider. It is ok to ask your scheme provider some hard questions around their strategy, performance and what measures they have in place to improve things. It is your money after all.
Our analysis also highlighted that in some instances fund names are irrelevant and this is evident in the growth fund category where a fund with the name "balanced" took out top honours. Second place went to a fund labeled a "balanced growth" fund.
Sadly, the name of a fund is not a good indicator of the risk profile it represents. You need to check the underlying basis and here is a good place to start.
An interesting observation from our regular savings model is how investors can effectively "de-risk" themselves by investing in the top funds of the category below where they would normally assess their risk tolerance. What this means in simple terms is that you can get a reasonable rate of return for less risk.
This leads us to wonder how much value is being added by those funds languishing in the bottom quartile within each of our categories and how these managers justify their fees.
Winners and losers
At the most conservative end of the risk spectrum the top default funds are providing investors with a rate of return which is superior to other conservative funds. This has surprised us as the default funds have a fairly rigid asset allocation guideline and are not afforded the same degree of flexibility in terms of where the money is allocated. Naturally you may think this could inhibit the returns but this does not appear to be the case from our analysis.
The Cash fund returns in KiwiSaver are generally dismal and below what is being offered by your local bank. Luckily inflation is running at under 1% p.a. otherwise the purchasing power of an investor's capital would be eroded completely.
To recap on the inputs for our regular savings model this is based on a 28 year-old who started KiwiSaver in April 2008, who earns an average wage, who is contributing the minimum along with their employer, and who receives all the government contributions. Tax is deducted at the appropriate rate, and fees such as the annual member fee that are not normally represented in unit pricing, have been deducted.
The results from our longer term analysis clearly show that by saving regularly and accepting there will be fluctuations in capital values from month to month, KiwiSavers who stuck to their guns with an aggressive strategy have ended up considerably better off - for now at least.
The difference between the best performing aggressive fund and the best performing conservative or default fund over the past seven years on an average annual basis is an impressive 7.3%. That is, the best performing aggressive fund has produced a 14.3% pa after-tax, after-fees return over the whole period. Whereas the best performing default fund produced 7.0% pa on the same basis.
Our review of all funds also shows a wide variation between the best fund and the average of the bottom five. Based on the strength of equity and property markets in recent times you would expect the largest gap to be for the aggressive and growth fund categories and our analysis confirms this.
Currency hedging of international investments will also contribute either positively or negatively to the overall performance of many funds, although the exact impact is unknown without conducting detailed attribution analysis across each of the funds.
Familiar names & a newbie
Our analysis continues to show some familiar names leading the various categories over the longer term: AON, AMP, ANZ, Mercer & Milford.
It is now time to add Kiwi Wealth to this exclusive group of top performers. Their strategies continue to show some dramatic improvement, and we are seeing the positive impacts their stellar recent returns are having on their long-term performance as they continue to move up our leader board.
During the last quarter Mercer has closed some of their single sector funds for commercial reasons, and these have now been removed from our analysis and rankings.
The table below highlights the best funds in each main class, and the range of returns between the top and bottom performers.
We also list the top funds as at March 31, 2015 based on our regular savings return model. For the purpose of comparison we have only used those managers who have been in existence for the entire analysis period of April 2008 to March 2015.
|Category||Top 3 Funds||Average of Top Five
|Average of Bottom Five
|# of funds invested for
|Top long-term return
|ANZ OneAnswer Int'l Property|
|#2||Milford Active Growth|
|#3||ANZ OneAnswer Australasian Property|
|AMP ANZ Default Balanced|
|#2||ANZ OneAnswer Balanced Growth|
|#3||Aon Russell LifePoints Growth|
|ANZ OneAnswer Balanced|
|#2||Kiwi Wealth Balanced Fund|
|Aon Russell LifePoints 2015|
|#2||Aon Russell LifePoints Conservative|
|#3||ANZ OneAnswer Conservative Balanced|
|Kiwi Wealth Conservative|
|#2||ANZ OneAnswer Int'l Fixed Interest|
|#2||ANZ Default Conservative|
1. The Conservative Fund data in the table excludes cash and default funds.
2. There are now nine default funds, however only five have been in existence for the full period of our analysis.
3. Insufficient number of funds to provide data.
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.