Are fund managers who are heavily weighted to local markets exposing investors to greater levels of risk?

By Craig Simpson

Our regular series of KiwiSaver category reviews, analysis of asset allocations and top holdings has highlighted that a number of schemes have large exposures to New Zealand bonds and shares within their portfolios.

We can't understand why some local managers would be willing to expose investors to additional risk by tilting heavily to a market that is not broadly diversified across all of the major industrial sectors or sub-sectors; is as small as a pimple on an elephant's bottom in terms of market capitalisation; and doesn't have a high degree of liquidity within stocks outside the top 10 companies (roughly 46% of the NZX50 index).

As at September 2015, there was a total of $30.3 bln in KiwiSaver accounts according to Reserve Bank of New Zealand (RBNZ) statistics. Of this $30.3 billion, approximately 50% was invested in NZ domiciled assets.

Just over $1 bln was transfered from Inland Revenue to KiwiSaver providers in the quarter ending December 2015. On average over the last 12-months, over $400 mln per month (including member tax credit payments) has been looking for a new home. With roughly $200 million per month trying to find a home in NZ assets is it any wonder that the domestic markets is holding up so well?

If we compare our findings to the NZ Super Fund which is a very long term investment portfolio, 65% of the fund's equity allocation is tilted towards global shares with just 4% in NZ shares at 31 December 2015. This type of weighting is more reflective of the overall size of the NZ market and economy as a whole.

We do expect actively managed KiwiSaver funds to have tilts to various markets or regions from time to time as a means to enhancing the investors returns however we have some concerns that within the conservative KiwiSaver strategies, investors in some funds could be exposed to a greater level of risk than they would otherwise be prepared to accept if they were to invest on their own accord.

It is important investors understand the make-up of their KiwiSaver portfolio and how their manager invests their savings, along with the returns are being generated. Remember, everyone is happy when markets are rosy and stellar returns are being made; the real test of your KiwiSaver managers metal is when markets are falling and volatile - like they have been for the last half of 2015 and early 2016. 

Sayonara Staples Rodway

The Staples Rodway scheme is in the throes of being transferred into Funds Administration New Zealand Limited (FANZ), Southland Building Society’s (SBS Bank) managed funds and investment advisory business.

As the Staples Rodway funds are closed to new business we are no longer reporting on these.

Lifestages rejigs its offer

The two lifestages funds (Capital Stable & Growth) were closed to new investment and two new funds have been created to take their place: Lifestages Income Fund & Lifestages High Growth Fund. We will begin reporting on these two funds in our next round of KiwiSaver reviews following the March 2016 results.

Best of the best

The funds to be awarded or special 'best in class' badge across all the various categories are listed below. These funds are the best-of-the-best as at the end of December 2015 in our opinion.

Compared to the last best in class summary to September 30, 2015, the main changes are Aon Russell Lifepoints Growth replaces ANZ's OneAnswer Balanced Growth Fund and we have also added ANZ's OneAnswer Conservative Balanced Fund as a joint recipient of the award in the Moderate category as the returns from the two top funds are almost identical (for the reasons we set out here).

Default: Mercer Conservative Fund

Conservative: Kiwi Wealth Conservative Fund

Moderate: Aon Russell LifePoints 2015 & ANZ OneAnswer Cons. Balanced

Balanced: AMP Nikko AM Balanced

Growth: Aon Russell LifePoints Growth

Aggressive: Milford Active Growth

The table below highlights the best funds in each main class, and the range of returns between the top and bottom performers.

This is the list of the top funds at December 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 December 2015.

Category	Top 3 Funds	Average of Top Five after fees after tax	Average of Bottom Five after fees after tax	# of funds invested for full period	Top long-term return after fees after tax
Aggressive		12.5%	7.4%	20
	Milford Active Growth				13.3%
#2	Aon Milford
#3	ANZ OneAnswer Australasian Property
Growth		9.6%	7.1%	16
	Aon Russell LifePoints Growth				9.8%
#2	AMP ANZ Default Balanced
#3	ANZ OneAnswer Balanced Growth
Balanced		8.5%	6.9%	13
	AMP Nikko AM Balanced				8.8%
#2	ANZ OneAnswer Balanced
#3	ANZ Balanced
Moderate		7.3%	5.6%	13
	Aon Russell LifePoints 2015				7.4%
	ANZ OneAnswer Cons. Balanced				7.3%
#3	ANZ Conservative Balanced
Conservative1		4.5%	n/a3	7
	Kiwi Wealth Conservative				5.7%
#2	ANZ OneAnswer NZ Fixed Interest
#3	ANZ OneAnswer Int'l Fixed Interest
Default2		5.9%	n/a3	9
	Mercer Conservative				6.5%
#2	ANZ Default Conservative
#3	ASB 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.

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

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 reviews of the Default, Conservative, Moderate, Balanced, Growth and Aggressive funds can be found here, here, here, here, here and here.