Our comprehensive review of Conservative KiwiSaver fund performance to June 2015, identifying who has the best long-term returns

Our comprehensive review of Conservative KiwiSaver fund performance to June 2015, identifying who has the best long-term returns

By Craig Simpson

One or two months of negative returns does not make a trend but investors sitting in conservative KiwiSaver funds could start to feel quite sick in the near future if we see the US Federal Reserve raise interest rates and continued volatility in sharemarket returns.

Many of the conservative KiwiSaver asset allocations we have seen have a bias to global bonds over domestic. The reasons are simple. First and foremost for diversification and access to liquidity secondly because global bonds have historically been less risky; and lastly there is a return premium when global bonds are hedged back to NZ dollars. The later has eroded with the recent rapid decline in the NZ dollar versus its major trading partners but nonetheless historically the yield pickup has been attractive.

Should we see a rise in US interest rates or events offshore that create an environment of geo-political instability, or uncertainty about future returns and corporate profitability, we could see conservative investors receive their first round of serious negative returns since 2007/2008. 

Our regular return savings model we use to measure performance is starting to see lower long run returns already, although these are reasonably minor at this stage.

We are not trying to alarm anyone unnecessarily but rather make readers aware that bonds can suffer capital losses, are not totally riskless and investors with larger exposures to bonds could experience some greater than expected variability in returns in coming months.

Specifically looking a the various conservative funds we are seeing the top come off the longer run returns and at this stage this has not has too much of an adverse impact on the overall balance of our regular saver who we model our analysis around.

Some of the drivers behind the drop in performance will be due to a spike in US and European bond yields which drives capital values lower; the sharp decline in the NZD versus it's major trading partners which has a negative impact on those funds with high degrees of hedging in place; and the decline in global stock markets on the back of the Chinese stock market sell-off and ongoing threat of a Greek default. Some other factors will be security or sector specific and impact the individual funds uniquely.

Although we have seen chaos and despair offshore, at home things have been trucking along with our local bond and share markets holding their own in local currency terms. These bright points will have helped returns, however in some cases not enough to keep some funds above the line.

Returns from the default funds continue to outperform many of the other conservative funds. in our survey the only conservative fund we would consider to be holding its own against the Default funds is the Kiwi Wealth Conservative Fund.

 Kiwi Wealth Conservative fund is also awarded our best in category award for delivering superior long run returns and at the same time delivering short term returns which are at least equal to or above the long run return

Since inception, and on a regular savings basis, the average of the top three Conservative funds (excluding Default funds) has produced compound annual returns of 5.6% p.a. Over the past three years, that return has been lower at 4.9% p.a.

Assuming you had been invested for the period April 2008 to June 2015, the difference between the average return of the top and bottom conservative fund (excluding Cash funds) in dollar terms is approximately $3,770. Including cash funds the difference is a staggering $5,000 or $57 per month since April 2008.

Across other conservative and cash funds a majority have under-perfomed their longer term average return. The Kiwi Wealth Conservative fund performance over the past three years sticks out like a sore thumb compared to its non-default fund peers.

We have been made aware that Milford Conservative fund will be shifting their asset allocation from 1 September to have a greater portion of fixed interest products and less shares. In doing this the manager is also lowering their capped management fee by 0.10% to 0.95%. It will be interesting to see how this change in strategy pans out over time.

Here are the full comparison as at June 30, 2015 for Conservative Funds.
 

Conservative Funds
 
 
 
Cumulative$
contributions
(EE,ER,Govt)
=+Cum net gains
after all tax,fees
Effective*
cum return
=Ending Value
in your account
Effective
last 3yr
return%p.a.
Since April 2008
X
Y
Z
to June 2015
 
 
 
$
%p.a.
$
                 
 Kiwi Wealth Conservative C C C
23,747
8,324
6.5%
32,071
7.1%
ANZ OneAnswer NZ Fixed Interest C C FI
23,747
7,071
5.6%
30,818
3.9%
ANZ OneAnswer Int'l Fixed Interest C C FI
23,747
6,022
4.7%
29,770
3.7%
Lifestages Capital Stable C C  
23,747
5,684
4.4%
29,431
5.1%
AMP Cash C D Ca
23,747
4,744
4.2%
28,491
3.1%
Mercer Cash C D Ca
23,747
4,572
3.5%
28,320
2.7%
Grosvenor Enhanced Income C D C
23,747
4,555
3.4%
28,302
2.9%
Fisher Funds Two Preservation C D Ca
23,747
4,470
3.4%
28,217
1.8%
ASB Cash C D Ca
23,747
4,427
3.3%
28,175
3.2%
Aon Nikko AM Cash C D Ca
23,747
4,365
3.3%
28,112
2.9%
ANZ Default Cash C D Ca
23,747
4,283
3.2%
28,031
2.6%
Staples Rodway Conservative# C D Ca 23,747 4,254 3.2% 28,001 2.9%
ANZ Cash C D Ca
23,747
4,200
3.1%
27,947
2.9%
Westpac Cash C D Ca
23,747
4,161
3.1%
27,908
2.8%
ANZ OneAnswer Cash C D Ca
23,747
4,077
3.0%
27,825
2.7%
Aon ANZ Default Cash C D Ca
23,747
3,496
2.5%
27,243
2.3%
Craigs fixed Interest C D Ca
18,785
3,326
3.5%
22,112
1.7%
---------------                
Column X is interest.co.nz definition, column Y is Sorted's definition, column Z is Morningstar's definition
C = Conservative, D = Defensive, Ca = Cash, FI = Fixed Income

* 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.

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 X Y Z
to March 2015      
$
% p.a.
$
       
 
 
 
 
 
Milford Conservative C C M
8,769
3,475 9.5% 11,846
n/a
BNZ Cash C D Ca 7,266 1,417 3.5% 8,683
n/a
---------------                
Column X is interest.co.nz definition, column Y is Sorted's definition, column Z is Morningstar's definition
C = Conservative, D = Defensive, FI = Fixed Income, M = Moderate, Ca = Cash

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 X Y Z
to June 2015       $ % p.a. $
                 
Westpac CP Plan 1 C A Mi 21,506 13,048 12.2% 34,554 16.6%
Westpac CP Plan 2 C A Mi 18,283 9,970 12.0% 28,253 16.3%
Westpac CP Plan 3 C A Mi 14,955 7,696 14.1% 22,651 15.9%
Westpac CP Plan 4 C A Mi 11,532 5,681 15.7% 17,213
n/a
Westpac CP Plan 5 C A Mi 8,371 3,475 16.0% 11,846
n/a
---------------                
Column X is interest.co.nz definition, column Y is Sorted's definition, column Z is Morningstar's definition
C = Conservative, A = Aggressive, Mi = Miscellaneous

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

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 review of default funds to June 30 can be found here

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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9 Comments

The current state of the bond market is a great example of conventional wisdom regarding risk being turned on it's head. Those heavily invested in "conservative" funds are playing a high risk game where any unanticipated upside to inflation will surely see them toasted as they well and truly lose the race to the exits. By the time the news reaches Main St it will be too late.

The exits are jammed for these bond owning muppets.

The worst commodities slump in 13 years is wreaking havoc for investors seeking to profit from companies in distress.

Distressed bonds have lost 8.2 percent this month as oil and coal prices slid, bringing this year’s loss to 12.2 percent, according to a Bank of America Merrill Lynch index that tracks the debt. The securities are on pace to lose more than 20 percent for the second straight year, the worst performance since 2008. Read more

Public disclosure is thin on the ground when it comes to the state of NZ dairy debts - an indefensible closed shop as far as it goes for the NZ bank underwriting class aka term depositors.

Yes, this commodity class is going to provide a taste of what's to come. ZH had a take on it as well;

http://www.zerohedge.com/news/2015-07-22/far-worse-1986-oil-downturn-has...

Surely Kiwibank is the place to be - I'm guessing nil exposure to dairy debt?

However a downturn is a downturn. If we get say an OBR event on one or more of the big 4 (and TSB is heavily exposed?) , surely it will be so bad that KB isnt far behind?

Then the depositors should bail shouldn't they.

Why? - they are just as stupid as the marginal milk producers when it comes to believing spin. And haven't we got the same condition of commissioners running ECAN in the current control structure operating at the RBNZ?

There wont be significant inflation IMHO...not until we have seen a depression like the 1930s.

Asset inflation is uncontrollably rampant and it pervades all our lives potentially or otherwise. It's unwind will be the depression.

You are right about that.... especially in regards to Real Estate..
The question is... When..???