Our comprehensive review of Balanced KiwiSaver fund returns to December 31, 2015, identifying who has the best long-term returns

By Craig Simpson

Markets were savage on any negative news as Chinese and commodity investors found out.

Volatility spiked in the later part of 2015 as the oil price collapsed and investor nerves became more fragile. The recovery from the GFC appears to have come to a screeching halt as capital preservation took precedence over trying to eek out excess returns.

Concerns around China, commodity prices and global growth were the main headline grabbers during the quarter. Growth forecasts are notoriously aggressive and it should not have been a surprise that both China and the global growth numbers were scaled back as disappointing data hit the tapes. There was some positive data around from time to time however this tended to be overshadowed as traders focused more on the short term negative headlines and took any excuse to offload assets.

Current analysis by Factset (a global data and research provider) of forward looking median GDP forecasts for China shows expectations for that country's GDP is expected to decline over the next three years to be around 5.5% by 2019. Even 5.5% growth is still a mighty effort if it can be achieved.

For our model investor who now has close to 8-years of regular investment in KiwiSaver we observed there were incremental improvements in the long run returns on an after tax and all fees basis. Against an apocalyptic backdrop this result is somewhat surprising. Having a mix of growth and income assets in roughly equal proportions is proving to be a winning strategy in the face of strong head winds across markets.

On a regular saving basis over the period from April 2008 to December 2015 there is approximately 2.6% difference between the top and bottom Balanced funds that are included in the directly comparable set. Comparing the average annual return of the top 5 Balanced funds to the top 5 Default funds the differential is 2.7% per annum.

Milford's Balanced Fund continues to deliver returns above 10% over both the shorter and longer time periods. After commenting the returns had tailed off last quarter, we have seen the Milford juggernaut turn things around and power ahead of the pack on a three year return comparison.

  AMP Nikko AM Balanced is the top performer in this category and has received our ‘best-in-class’ title for this quarter. AMP's Nikko AM Balanced fund has retained its top spot from last quarter and there are two high performing ANZ funds nipping at their heels.

Over the full period, Balanced funds have delivered an extra $4,100 in return on average compared to the Default funds. The additional return received over the more conservative funds has expanded over the past quarter. These numbers are based on the average cumulative gain after tax and fees for the top five contributors in each sector.

Here is the comparison as at December 2015 for Balanced Funds:

Balanced 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 December 2015      
$
% p.a.
$
                 
  AMP Nikko AM Balanced B G G 25,648 13,122 8.8% 38,771 9.6%
ANZ OneAnswer Balanced B B B 25,648 12,543 8.5% 38,191 8.5%
ANZ Balanced B B B 25,648 12,392 8.4% 38,041 8.4%
Aon Russell LifePoints 2025 B B B 25,648 12,385 8.4% 38,033 8.0%
Aon Nikko AM Balanced B G G 25,648 12,223 8.3% 37,872 9.2%
Aon Russell LifePoints Moderate
B
B
M
25,648 12,109 8.2% 37,758 7.6%
Mercer Balanced* B B B 25,648 11,765 8.0% 37,414 8.0%
ANZ Default Balanced B B B 25,648 11,716 8.0% 37,365 8.3%
Kiwi Wealth Balanced Fund B B B 25,648 11,310 7.7% 36,959 9.0%
AMP Fisher Funds Two Balanced
B
B
B
25,648 11,171 7.6% 36,820 7.7%
ASB Moderate B B M 25,648 10,492 7.2% 36,141 7.1%
Fisher Funds Two Balanced
B
B
B
25,648 10,390 7.2% 36,039 7.2%
AMP Moderate Balanced B B B 25,648 8,885 6.2% 34,534 5.5%
Grosvenor Balanced B B B 25,648 8,873 6.2% 34,521 6.3%

* The Mercer KiwiSaver Scheme Balanced Fund has recently changed the underlying asset allocation and has been reclassified as Balanced by interest.co.nz, Sorted & Morningstar. We have therefore updated the table above to reflect the change.

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

Balanced 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 2015
 
 
 
 
% p.a.
 
 
 
 
 
         
Milford Balanced
B
B
B
18,840 9,932 11.5% 28,773 11.0%
BNZ Balanced
B
B
B
9,168 2,197 6.9% 11,364 n/a

Spotlight on the top and bottom performers

The following table and commentary examines the benchmark asset allocations for both the top and bottom performing funds to December 31, based on our long term investment horizon criteria. We have also included the Milford Balanced fund for comparison purposes as this fund is building a substantial track record and over the short term is head and shoulders above their competitors in the Balanced KiwiSaver universe. The information used is from the respective prospectuses, periodic disclosure statements and other publicly available information.

Asset Allocation AMP
Nikko AM
Grosvenor Milford
  Benchmark % or range
Cash or equivalents 5% 0% - 20% 6%
Fixed Income 23%
(NZ 10%, Int'l 13%)
20% - 60% 33%
(NZ 17%, Int'l 16%)
Property 5% 0% - 20% 5%
NZ & Australian Shares 21% 5% - 25% 33%
International Shares 26% 20% - 40% 23%
Other (alternative assets) 20%
(10% inc. & 10% grwth)
0% 0%
Other fund info affecting performance
Total Annual Fees (30/9/15) 1.29% 1.14% 1.40%
Hedging policy (back to NZ$) Fully hedge all exposures to int'l bonds and alternative assets. All other assets are at the discretion of the underlying manager (Nikko AM) Int'l shares 50% hedged but can range between 20% - 80%. Australian shares 0% hedged but can range between 0% - 50%. Int'l bonds 100% hedged Normally between 85% to 90% hedged but the foreign currency position is actively managed

As we can see from the asset allocation information, there are distinct differences in the way these managers approach their investing within KiwiSaver. Both AMP (Nikko AM) and Milford have definitive target benchmark allocations but will drift from these from time to time as market conditions necessitate. Grosvenor's approach is to be less prescriptive and leave it up to their managers to allocate funds in each asset class as they see fit.

Grosvenor has the potential to be more conservative in adverse market conditions with their fixed income exposure being up to 60% and the cash holding could go up to 20%. Theoretically the fund could be 80% in income assets at some stages.

All three funds have allocations to property, either onshore or offshore and this exposure will be predominately via listed securities as it offers a greater level of liquidity compared to direct investments in bricks and mortar.

AMP Nikko AM has an exposure to alternative investments which the other funds do not. This exposure is 10% in income and 10% in growth oriented alternatives. The use of alternative assets can assist in diversification of the overall portfolio as many of the assets in this category have traditionally lower correlations to other asset classes. Having said this we have seen extreme volatility in the commodities (especially oil and metals) which are traditionally considered to be alternative assets and managers exposed to various commodity linked securities will be facing substantial capital loses.

The AMP Nikko AM Balanced fund has a split between income and growth oriented alternatives so they should be able to diversify some of the risk and minimise the impacts on the portfolio.

The two better performing funds have higher total fees and while this is an impost on returns in most cases, the returns received over the longer term suggest the managers are adding substantial value and maybe justifying their fees. Fees are a highly contentious issue and although lower fees are preferred, investors should not base their investment decisions solely on fees.

Many of the top 10 investments in these funds at 30 September (the latest available quarterly periodic disclosure statement) shows the managers invest in a selection of passively managed investments (predominately Vanguard funds); externally managed investments via global managers (e.g. Magellan, JP Morgan) and various NZ and Australian shares and bonds.

Across all three funds there is substantial investment experience across key personnel.

We believe the more active approaches of AMP Nikko AM and Milford Balanced funds along with a reasonably well defined long term asset allocation benchmark are two of the major contributing factors to the success of these funds. Underlying security selection, sector biases, hedging positions will also contribute to the returns however the exact contribution of these secondary items is difficult to quantify based on publicly available information.

It is important to keep in mind that the performance reporting is a snap shot in time based on our regular savings model.

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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.

Our December reviews of the Default, Conservative, and Moderate funds can be found here, here, and 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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