Craig Simpson examines the asset mix of KiwiSaver default funds and finds surprisingly wide differences in how they meet their mandate in this $7.2 bln sector

Craig Simpson examines the asset mix of KiwiSaver default funds and finds surprisingly wide differences in how they meet their mandate in this $7.2 bln sector

By Craig Simpson

Just how conservative is your Default Fund?

Actually, some are really conservative in the way they are investing. For example, AMP's Default Fund is almost 50% in cash or cash equivalents.

Others are not so - contrast AMP's with the Fisher Funds Two equivalent where only 12.7% is held in cash.

The managers running the country's nine default funds are allowed to invest between 15% and 25% into shares across either local or offshore shares but the rest of the fund can be invested across the other main investment sectors - cash, fixed income, property and alternatives.

There are some surprising trends, including intensive use of Vanguard funds by some, a wide range of investments allocated to cash, and even some with property exposures.

It is unlikely we'll ever see large allocations to either property or alternatives as these come in under the equity exposures for the purpose of the asset allocation mix.

These nine managers control funds worth $7.2 bln for about 710,000 members.

The table below outlines the asset allocations for the current nine default funds.

The second table outlines the top 10 investments inside each fund as disclosed under the respective periodic reporting regime.

Each quarter the fund managers for each scheme have to disclose their top 10 investment holdings and then following the end of the financial year (March 31) they disclose their entire portfolio, warts and all.

Default Provider Cash % Fixed Income
NZ/Aus:Int'l
%
Shares
NZ/AU:Int'l
%
Property % Alternatives
 Other
%
  3 year
return*
AMP 46.3 14.7 14.7 7.1 17.2       5.3%
ANZ Default 25.4 14.5 39.3 4.3 10.4 3.1     6.0%
ASB 19.4 30.7 29.6 9.2 11.1       6.1%
BNZ 34.1 10.8 35.1 5.9 14.2       4.9%
Fisher Funds Two 12.7 43.9 24.2 6.0 6.5 6.8     5.4%
Grosvenor 26.6 25.8 27.8 6.4 12.5 1.0     n/a
Kiwi Wealth 40.5 9.7 30.1   19.7       n/a
Mercer 36.1 14.8 28.8 4.2 12.4 1.6 2.0   5.8%
Westpac 35.2 23.0 22.9 7.8 8.7 2.5     n/a

All the asset mix percentages have been rounded so the totals may not equal 100%

* This is our regular savings return after tax and fees based on our model investor for the year ending March 31, 2016. Fund returns showing n/a means the fund has not been going three years.

   Top ten holdings ...
Provider #1 #2 #3 #4 #5 #6 #7 #8 #9 #10
AMP Westpac cash deposit Rabobank cash deposit ANZ deposit BNZ Bond ASB note ASB note NZGS ASB note NZGS Orbis Global Equity Fund
ANZ Default (ex OnePath) Blackrock W/Sale Indexed Int'l Equity Fund NZGS NZGS NZGS NZGS NZGS BNZ deposit NZGS ASB deposit Rabobank FRN
ASB Westpac deposit NZD Vanguard Int'l Shares Index Fund (Hedged) Vanguard Int'l Shares Index Fund ASB deposit NZD ASB deposit NZGS NZGS NZGS ASB deposit NZGS
BNZ Russell Global Bond Fund Nikko AM Wholesale Cash Fund Russell Global Opportunities Fund (Hedged) Russell NZ Fixed
Interest Fund
Russell NZ Shares Fund BNZ  deposit        
Fisher Funds Two (ex Tower) Bayfair Mall ANZ deposit NZGS NZGS NZGS NZGS ASB FRN Westpac FRN Auckland Int'l Airport Rabobank FRN
Grosvenor Vanguard Int'l Credit Securities (Hedged) Vanguard Int'l Fixed Interest Fund (Hedged) Vanguard Int'l shares Index Fund (Hedged) Vanguard Int'l Shares Index Fund Kiwibank TD ASB bank bill NZGS ANZ TD ANZ deposit NZGS
Kiwi Wealth Vanguard Total Stock Market ETF Vanguard Total Int'l Stock ETF Westpac NZD account KfW Banken
gruppe bond
Westpac TD Westpac TD ASB TD NZ LGFA ANZ TD BNZ TD
Mercer AMP NZ Cash Fund ANZ Wholesale Sovereign Bond Fund Challenger Harris Global Sovereign Bond Fund CFS Global Corporate Bond Fund Schroder Global Core Fund Westpac account USD cash account Fisher Institutional Property Fund Fletcher Building US treasury security
Westpac Vanguard Int'l Shares Index Fund Vanguard Int'l Shares Index Fund (hedged to NZ$) NZGS NZGS NZGS Westpac  deposit NZ LGFA NZ LGFA Fletcher Building BNZ bond
Key: TD = term deposit, FRN = Floating Rate Note, NZGS = NZ Government Stock, NZ LGFA = NZ Local Govt Financing Agency, ETF = exchange traded fund

There are many similarities across these Default Funds but it is the differences that drive performance.

A majority of the schemes have an exposure to NZ Government Stock (NZGS), bank deposits (call and term deposits) and the Vanguard suite of funds - some hedged others unhedged. There is also a high passive investment style across the Default Funds which will be allowing the managers to keep their fees reasonable.

BNZ's six holdings make up 100% of the funds exposure. Russell Investments have several sub-managers in each fund and it is likely this Default Fund will be less diversified than the others although we can't categorically say this is the case.

Property and alternatives hardly feature in the top 10 investments - with one notable exception: Fisher Funds Two does have a NZ unlisted property exposure as its biggest holding as at March 31, 2016 (4.8% of the total fund).

Five out of the nine prefer global bonds over NZ securities.

Over the past three years the best performing fund after tax and fees on a regular saving basis has been the before tax has been ASB's Default Fund, closely followed by ANZ Default and Mercer. ASB's fund is roughly 20% cash and the allocations to bonds and equities are fairly even split between domestic and global.

The worst three year performance is from BNZ and they have a similar allocation to Mercer, with the exception of the property and alternative exposures.

We could draw a couple of conclusions from this. Firstly, the exposure to property and alternatives are adding value. And secondly, the sub-managers that Mercer uses in their various funds are adding considerably more value than for other funds. 

Fisher Funds Two's Default Fund has a substantial exposure to bond markets and will have benefited from the fall in global bond yields. Their exposure to cash and equities is considerably smaller than their peers. The fund also has a property exposure which is outsized compared to the other funds in the category.

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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17 Comments

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Those returns are kind of poor but that's to be expected for default providers. A lot of people are going to have a lesser retirement than others using the default schemes. Given the numbers it's safe to assume that the majority aren't close to retirement age.

Real world examples from two friends. One is young and doesn't care about being in the default provider after only being in the workforce for a couple of years. He's happy with the return so far.

Another friend I talked to didn't understand that the kiwisaver was "his" money. He asked me if the money would still be there after being out of work for a while. There are bound to be a few people that just don't understand it's an investment and what happens with the money.

I know others that are on contributions holidays which hurts the benefit from adding to compounding and dollar cost averaging. People know it's not good but cashflow is tight for a lot of people.

IRD data indicates 18% of all KiwiSavers are over 55yrs. A combined 35% are over 45 years of age. So yes there are a large number of 'youngins' in KiwiSaver who have some time on their hands.

As you rightly say, there are lots who will be settling for lower balances and I guess they will have to deal with that when the time comes

I wonder how many of those young ones are kids who's patents signed them up to get the kick start?

Suggest most of them are would be my guess. The $1,000 kickstart was obviously the incentive and the data is showing a slow down in the under 17's which I believe is directly resulting from the removal of the freebie in the 2015 budget.

Making a decision about whether the investments returns are poor, average or great depends on your risk and return objectives and the appropriate benchmarking of those returns. In this low yield world, the above returns might be considered reasonable. What I notice however is the alarming concentration of risk in bank term deposits and bonds. You wonder whether the managers are being prudent here, particularly in the new world of OBR...

OBR etc. Thats a real worry. I would not have my Kiwisaver hosted within a large multi sort of institution like our big four banks. There is too much temptation for them to invest 'internally' and decisions about that are likely to be in the banks internal interest and not mine.

The bank deposit and bonds are in the big banks and are better quality than some of the rubbish Mum and Dad investors get into. I'd be concerned if I saw lesser quality securities in the portfolio. I really can't understand the unhealthy obsession with OBR when it comes to the big 4 banks. If one of the big 4 was in trouble do you not think we would have bigger things to deal with than worrying about our deposits.

Yeah I probably overstated on the OBR thing Craig. But 'internal' investments do run the risk of suiting agenda's other than mine. Not saying they are always crazy or risky, but they might settle for less return. Of course the bank would say they don't do that, but seeing these released emails does not give confidence. " .....ASIC said it had identified 44 separate occasions where it ­alleged ANZ created an artificial price for bank bills. While ANZ was the first Australian bank to face formal accusations of rate rigging, Westpac now also faces a civil claim of alleged manipulation of the BBSW........"
http://www.theaustralian.com.au/business/financial-services/anz-traders-...

I think you will see all the major Aussie banks have allegations of manipulating the BBSW made against them if ANZ and Westpac are in the firing line. Agree though that sometimes your interests and that of the manager (bank) may not always be aligned and that is where you need to find managers that have personal money invested in the respective funds and some decent skin in the game - you soon see interests aligned with investors when bonuses and incentive payments are at risk.

I am in the process of joining my daughter to kiwisaver however I would really like to know what company would invest in NZ property especially the Auckland property market? I can tell you right now that those are the companies that will be making big money for their investors at this moment so please help me get my daughter started with kiwi saver with a bang. Thanks.

bang? more like a pop.

The property investments are commercial via listed property trust (LPT) vehicles both here, in Aussie and further a field. Totally different risk profile and dynamic to the residential market.  

In terms of the funds that do have property exposure there are a number. The managers I report on that have some reported to the FMA as having some form of property exposure include ANZ OneAnswer, ANZ, ANZ Default, Fisher Funds Two, AMP, Milford, Generate, CraigsIP (Quay Street), Grosvenor, Westpac, ASB, Mercer, Fisher Funds, AON

NOTE: not every fund from these managers has a property exposure so depending on which manager and fund combination you chose you will still have to look at their disclosure statements and reports.

 

Thanks Graig I actually signed over to One Answer Australasian Property Fund myself, after using sorted.org / aggressive / highest returns - they always came up top of the list. So I am thinking about signing her up for it as well. But if you know of a better one over a longer term as she is only 18 please let me know. I know of no other easier way of searching for providers other than sorted.org as I am not really financially qualified to know what Im doing lol.

M, my suggestion for you and your daughter is to get advice from a qualifeied financial adviser. If you are not qualified to be making financial decisons as you suggest then you should be seeing someone who can help you make the most appropriate KiwiSaver scheme selection.

Selecting a fund solely on financial performance can be a dangerous proposition and not is normally recommended.

If you do choose to get advice please ensure you make sure your adviser discloses all their conflicts of interest and how they are remunerated. Also make sure your adviser is able to provide advice on a wide range of schemes so you have some choice as to who to go with.

The rate of return for kiwisavers over 50 must be of minor significance compared to your contribution, your employers contribution, & the so-called tax credit of $500.
The difference between 3% return versus 6% return on $50k is $1080 after tax vs $2160. Will that make a big difference really?

Obviously depends on the strategy you are investing into and your financial capacity post retirement. If you don't need the funds you can afford to be more carefree with your KiwiSaver. Not everyone over 50 needs to scale back their risk profile to be more conservative.

But yes, those in ultra defensive strategies will be wondering if their KiwiSaver is working for them.