Our comprehensive review of Balanced KiwiSaver fund returns to March 31, 2016, identifying who has the best long-term returns

Our comprehensive review of Balanced KiwiSaver fund returns to March 31, 2016, identifying who has the best long-term returns

By Craig Simpson

Fund managers who dare to venture off the beaten path are coming into their own and adding significant value over both the short and longer term.

Volatility in markets brings with it a myriad of opportunities for making money. Within KiwiSaver only a few managers are venturing off the standard track and allocating funds to alternative investment assets and strategies which have the ability to make money regardless of market direction.

Alternative strategies are not just about generating as much profit as possible. Managers are also keen to protect the downside and can invest into products that have either a negative or very low correlation with shares and fixed income securities.

We suspect over time more managers will embrace a larger 'alternatives' exposure in KiwiSaver portfolios as their customer base becomes more comfortable with non-conventional investments and strategies.

Support for global markets has been boosted recently by further rate cuts in Europe and some dovish comments from the US Federal Reserve (Fed) and halving rate hike forecasts. Expectations of interest rates remaining in the lower for longer camp caused a sell-off in the USD and gave equity markets a leg up out of the hole they were slipping further into.

Helping to boost equity markets further is capital coming in from Chinese investors who are diversifying into non-Renminbi denominated assets. International economist Andrew Hunt in his latest commentary estimates capital of up to US$200 billion per month is flowing into financial markets.

Although many of the funds in this sector will have taken a battering in the early stages of 2016 we have seen some strong unit price rebounds during March as markets climbed. A majority of the funds in this sector have posted positive one year returns based on changes in unit prices which are calculated on an after fees but before tax basis.

Bond exposures have also benefited from the additional spike in volatility as investors flocked to safe haven Treasury and sovereign bonds and pushed yields lower (increasing capital values).

Balanced KiwiSaver funds continue to grow in value and not all of the growth is via the regular contributions. We have seen AMP Nikko AM Balanced and Milford Balanced funds continue to add value from above sector average returns.

On a regular saving basis over the period from April 2008 to March 2016 there is approximately 2.7% (last quarter the difference was 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 now 2.9% p.a (previously 2.7% per annum).

The increase in this difference is counter intuitive. You would normally expect that Balanced funds with their greater equity exposure will have seen some of the top come off the returns. We did note in our last review the Balanced funds were defying market sentiment.

Not all the funds in the sector are defying gravity. Kiwi Wealth Balanced Fund currently sits around the middle of the pack but has been one of the casualties of the recent market conditions. The unit price change for the past 12-months is showing a -1.3% return. Our regular return model shows the fund return for this period has been indifferent.

  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 two quarters.

Here is the comparison as at March 2016 for Balanced Funds:

Balanced Funds      
(EE, ER, Govt)
+ Cum net gains
after all tax, fees
cum return
= Ending value
in your account
last 3 yr
return % p.a.
since April 2008 X Y Z
to March 2016      
% p.a.
  AMP Nikko AM Balanced B G G 26,471 15,043 9.4% 41,514 10.5%
Aon Russell LifePoints 2025 B B B 26,471 14,085 8.9% 40,556 8.5%
Aon Nikko AM Balanced B G G 26,471 14,029 8.8% 40,500 9.9%
Aon Russell LifePoints Moderate B B M 26,471 13,846 8.7% 40,317 8.2%
ANZ OneAnswer Balanced B B B 26,471 13,839 8.7% 40,310 8.5%
ANZ Balanced B B B 26,471 13,639 8.6% 40,110 8.3%
ANZ Default Balanced B B B 26,471 12,935 8.2% 39,407 8.3%
Mercer Balanced B B B 26,471 11,851 7.6% 38,322 7.6%
Kiwi Wealth Balanced Fund B B B 26,471 11,207 7.2% 37,678 7.5%
AMP Fisher Funds Two Balanced
26,471 12,600 8.0% 39,071 8.2%
ASB Moderate B B M 26,471 12,196 7.8% 38,667 8.0%
Fisher Funds Two Balanced
26,471 11,599 7.5% 38,070 7.1%
AMP Moderate Balanced B B B 26,471 10,449 6.8% 36,920 6.3%
Grosvenor Balanced B B B 26,471 10,253 6.7% 36,724 6.9%
Milford Balanced B B B 19,663 19,663 11.5% 30,427 10.3%
BNZ Balanced B B B 9,990 2,744 8.4% 12,734 7.3%

Observations and factors driving performance

The NZ market is gaining more coverage via Exchange Traded Funds (ETFs) and foreign ownership of the NZX50 (free float) index is sitting at 10-year highs according to Mint Asset Management. Over 45% of the free float index is foreign owned which is considerably higher than it was in early 2013 when foreign ownership was below 30%. The flow of foreign money into our market is holding prices up and to some degree protecting the KiwiSaver funds with higher NZ share exposures from suffering from the same levels of volatility occurring in other markets. These same managers might be in some strife when the foreign money exits.

We noted in the commentary above that the use of alternative assets in portfolios is very low. Across this category, the fund with the most significant exposure to alternative investments is sitting at the top of the leaderboard, and is our best in class fund. AMP Nikko AM Balanced has 20% of the fund's capital split between fixed interest options (10%) and JPMorgan Multi-Strategy Fund (10%). Nikko Asset Management (Nikko AM) are responsible for running the underlying strategy on behalf of AMP.

The JPMorgan Multi-Strategy fund is an absolute return fund, which means the manager tries to deliver positive returns across the market and with low volatility. Often the term hedge fund is used to describe these types of securities.

The fixed interest options component is also provided by Nikko Asset Management. The Options fund which Nikko AM run invests into cash deposits and bank bills with highly rated financial institutions. The assets are then used as collateral security for derivatives, in particular, selling options on long-term NZ, US, UK, Euro bloc or Australian government stock. Most options are written for one month and provide the institutional purchaser with a payout if interest rates move by more than a prescribed margin in one particular direction. The Fund earns a premium for writing (selling) the options. The Fund will write options on government bonds with maturities between 5 and 15 years.

Both of these securities have been performing over their respective benchmarks for the past five years, although at times the monthly returns can appear to be choppy.

The better performing funds in this sector have a tilt towards global fixed interest which is fully hedged back to NZD. Global bond exposure offer managers the opportunity to benefit from greater diversification and selection of securities across a wide range of sectors and industries as well and picking up a hedging premium (approximately equal to the NZ cash rate - the global cash rate) when hedging back to NZD.

The Milford Balanced Fund has an overweight position (compared to their neutral benchmark) toward the non-KiwiSaver Milford Diversified Income Fund. This holding makes up 50% of the total investment capital. The only other notable deviation from a neutral position is the 5% underweight position in global shares. The fund's share allocation is almost split 50/50 between global and Australasian. Compared to other funds in this category the asset split of income vs growth for the Milford Balanced Fund is more conservative however this is not impairing the overall performance of the fund.

The three Aon funds that appear at the top of the table have roughly 50% of their global equity allocation hedged back to NZD. AMP Nikko AM on the other hand leave the equities hedging to the discretion of the underlying manager (Nikko AM) and Milford is normally between 85% to 90% hedged but the foreign currency position is actively managed. It is not black or white when it comes to hedging equity positions. Some managers prefer to remove the currency risk completely and not worry about it while others try to manage it on a day-by-day basis - both methods have varying degrees of success depending on the time frame you are studying.

The performance of the Kiwi Wealth Fund has been hamstrung by the exposure to global equities which exceeds their direct peer group average. Kiwi Wealth have a policy of not investing into Australasian shares. They favour global markets as there are clear liquidity and diversification benefits available for their clients over the long term. The current market volatility and movements will be impacting their portfolio more than their peers but over the long term the expectation is that a diversified portfolio of global equities will deliver similar perform to NZ shares but with lower levels of risk. The manager accepts there will be periods where their fund underperforms their peers in the short term.

Furthermore, we understand there are some previous tax credits the fund has received for losses made following a change to the way tax is accounted for on foreign currency transactions. These tax credits are not directly reflected in the unit pricing data provided to us and therefore, are not used, or reflected in, our regular saving return calculation. The regular savings return calculated for this period will be potentially understating the performance of the fund. The same issue will apply in any other fund that has tax credits held within the fund and not reflected in unit pricing provided to us.

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


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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