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

By Craig Simpson

A majority of the shorter term returns for Default funds are now trailing the longer-term return numbers as uncertainty around China's economic growth and jitters across global stockmarkets take their toll.

This is a clear trend reversal from what we have seen over many of our past quarterly reviews and should aid in sharpening investor focus back to longer term return data.

Furthermore, some of the monthly return data suggests in some instances the last quarter returns from cash have been superior to conservative portfolios.

The reason behind this is two fold. Firstly global assets, both shares and bonds have recorded negative returns of late and secondly a manager who is either fully hedging or majority hedging their international assets back to NZ dollars will have seen any loses on these assets magnified (or gains offset by movements in the NZ dollar).

The difference in returns between the Mercer Conservative (Default) fund which is ranked number 1 based on our regular savings model since April 2008, and the average of the top 5 Cash funds was previously $3,582, it is now $4,154. The variance is mainly due to the superior return for bonds over cash. The equity component within the Default funds will also be helping extend the gap, however in recent times equities have been a drag on the overall portfolio return, unless of course they were unhedged.

Funds holding a majority of NZ bonds and especially government stock will have benefited from recent Official Cash Rate cuts.

Managers with a focus towards Australian resource and material stocks will have performed worse than many peers as these two sectors were hit hard.

At home our share and bond markets have shown tremendous resilience in the face of some serious headwinds and although in negative territory, they are only down a fraction of what their global counterparts are.

A weaker NZ dollar against many of our main trading partners has reduced returns further and provided an unfortunate double whammy for investors who are in funds with assets that are fully hedged back to NZ dollars.

Our performance table below looks specifically at the performance of the current nine Default options available. The four new Default managers appear at the bottom of the ranking table because they have not been vested for the full period.

The data for the new Default funds is since inception of the respective funds. Comparing a new entrant with an old hand should be done with caution as the new funds have not proved themselves over a full market cycle or stock market correction as occurred when KiwiSaver first launched in 2007.

Since inception, on a regular savings basis, the average compound average annual return of the five Default funds that have been in operation since April 2008 has been 5.8% p.a. (previously 6.1% p.a.). This rate of return on an after tax and fees basis is still well ahead of what investors are getting on longer dated term deposits at present.

The reduction in overall performance compared to other review periods is consistent with data we are seeing reported and highlighted in our summary here.

Over the past three years, the average return from the top five default providers has reduced from 6.4% p.a. to 5.5% p.a. We have noticed return contraction over the last two quarters and this is reflected in the results. The past few quarters have seen a slow deterioration in short term returns and we would expect this trend to continue into 2016 based on current market sentiment and volatility.

Assuming you had been invested for the period April 2008 to September 2015, the difference between the average return of the top and bottom Default fund is approximately $2,000 (previously $1,700). While this amount may not sound much now, over time as it compounds it will become substantial.

There is no 'best in class' performer in the Default category this quarter despite the Mercer Conservative Fund being the top ranked performer. To be awarded the honour of best in class the fund must be the top performer over the full period of the review and at the same time provide investors with a three year return that equals or exceeds the long-run return.

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

Over the shorter three year period a majority of Default funds exceeded their longer term return numbers with the exception of the AMP Default Fund which has seen returns tail off and they are the worst performers based on our regular saving return model since April 2008.

Here are the full comparison as at September 30, 2015 for 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 X Y Z
to September 2015      
$
% p.a.
$
       
 
 
 
 
 
 Mercer Conservative C C C
24,968
8,775 6.5% 33,743 5.9%
ANZ Default Conservative C C C
24,968
8,343 6.2% 33,311 5.6%
ASB Conservative C C C
24,968
7,698 5.7% 32,666 5.3%
Fisher Funds Two Cash Enhanced C D C
24,968
7,603 5.6% 32,571 5.0%
AMP Default C C C
24,968
6,784 4.8% 31,752 4.4%
                 
BNZ Conservative C C C 8,487 1,633 4.4% 10,120 n/a
Kiwi Wealth Default C C C 4,215 1,262 6.3% 5,477 n/a
Westpac Defensive C C C 4,215 1,162 3.9% 5,377 n/a
Grosvenor Default Saver C C C 3,985 1,169 4.5% 5,154 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

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Update: Westpac Defensive data updated to correct error

 

For most default funds, the last three year's returns 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 of a broader range of conservative funds available. Many of the 'traditional' Conservative and Cash funds are underperforming the Default funds. We will look at the rest of the Conservative funds in another article.

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 your life stage.

You should move only with appropriate advice and for a substantial reason.

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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