Our comprehensive review of conservative KiwiSaver fund performance to June 30, 2016, identifying who has the best long-term returns

Our comprehensive review of conservative KiwiSaver fund performance to June 30, 2016, identifying who has the best long-term returns

By Craig Simpson

The defensive qualities displayed by conservative KiwiSaver funds came to the fore during the last quarter. The low equity exposure in these funds has certainly helped insulate investors from the increased volatility during the quarter.

The uncertainty that surrounded the 'Brexit' vote had investors scampering out of shares and into safe haven assets such as US, Japanese and German bonds.

Consequently we saw yields on these securities fall substantially to the point that some are now in negative territory.

The NZ market has also seen a downward shift in yields as investors braced themselves for the unknown.

Shorter dated NZ government bonds are trading at historically low yields (under 2%), while US equivalents are at levels not seen since World War II.

The downward spiral in yields and upswing in capital values has seen the two ANZ OneAnswer fixed income funds scoot past the KiwiWealth Conservative Fund to take the top two spots in our performance table. ANZ OneAnswer's global fixed income fund will have picked up some hedging gains as the NZ dollar spiked against other major currencies. This fund is fully hedged as are most other global bond exposures in KiwiSaver funds.

Funds in this sector that are cash heavy will be trailing those with larger bond exposures as the returns on cash have been abysmal.

The NZ share market took a breather last month, down 2% on the main index. Over the past twelve months there is daylight between the performance of the NZX50 index and the next best sharemarket, the Australian ASX 200 Accumulation Index (in AUD terms).

ANZ OneAnswer Int'l Fixed Interest is awarded our best in class honour as having the highest average annual long term and short term returns after tax and all fees.

Assuming you had been invested for the period April 2008 to March 2016, the difference between the average return of the top five default funds and conservative funds in dollar terms currently sits at $2,142. This means an investor who is invested outside of the top conservative fund would be better off in a default fund. This goes against the principle that a default fund is a short term holding place for KiwiSaver funds until such time as the investor chooses a long term strategy.

Here are the full comparisons to June 30, 2016 for Conservative Funds.

Conservative Funds
 
 
 
Cumulative$
contributions
(EE,ER,Govt)
=+Cum net gains
after all tax,fees
Effective*
cum return
=Ending Value
in your account
Effective
last 3yr
return%p.a.
Since April 2008
X
Y
Z
to June 2016
 
 
 
$
%p.a.
$
                 
ANZ OneAnswer Int'l Fixed Interest C C FI 27,378 10,222 6.3% 37,600 7.5%
ANZ OneAnswer NZ Fixed Interest C C FI 27,378 9,795 6.0% 37,173 6.6%
Kiwi Wealth Conservative C C C 27,378 8,817 5.4% 36,195 5.1%
AMP Cash C D Ca 27,378 5,619 3.4% 32,997 2.9%
Mercer Cash C D Ca 27,378 5,415 3.3% 32,793 2.7%
ASB Cash C D Ca 27,378 5,400 3.3% 32,778 3.1%
Grosvenor Enhanced Income C D C 27,378 5,319 3.2% 32,697 2.6%
Fisher Funds Two Preservation C D Ca 27,378 5,225 3.1% 32,603 2.7%
Aon Nikko AM Cash C D Ca 27,378 5,176 3.1% 32,554 2.6%
ANZ Default Cash C D Ca 27,378 5,087 3.1% 32,465 2.7%
ANZ Cash C D Ca 27,378 5,013 3.1% 32,391 2.7%
Westpac Cash C D Ca 27,378 4,999 3.0% 32,377 2.7%
ANZ OneAnswer Cash C D Ca 27,378 4,840 3.0% 32,218 2.6%
Aon ANZ Default Cash C D Ca 27,378 4,174 2.4% 31,552 2.2%
Craigs fixed Interest C D Ca 22,386 4,188 3.5% 26,574 2.7%
Kiwi Wealth Cash Plus C D Ca 12,969 2,246 3.8% 15,215 3.0%
Kiwi Wealth Cash C D Ca 12,383 2,011 3.4% 14,394 4.8%
Milford Conservative C C C 12,245 3,798 8.9% 16,043 8.0%
BNZ Cash C D Ca 10,720 1,702 3.1% 12,421 2.0%
---------------                
Column X is interest.co.nz definition, column Y is Sorted's definition, column Z is Morningstar's definition
C = Conservative, D = Defensive, Ca = Cash, FI = Fixed Income

Conservative fund observations

This quarter has all been about bond returns and the volatility in equity markets.

Mercer's Conservative Fund and ANZ Default Conservative Fund, which are both default funds, have outperformed the best of the conservative category funds over the long term. ASB's Default Fund is not far behind these leaders either.

Within the bond holdings the tilt towards global sovereign or government bonds has been one of the biggest contributors to performance.

Kiwi Wealth, as we noted in our last review, had a bias towards high quality global credit. This focus towards corporate debt and the lack of NZ share exposure are likely to be the main contributors behind Kiwi Wealth's performance slowing down over the past two quarters. The Barclays Global Aggregate Index hedged to the NZ dollar, which measures the performance of global corporate debt, has underperformed global government bonds by approximately 1.5% over the 12-months to June.

Hedging positions across the various funds with international exposures will also be a contributing factor in some of the performance data. Hedging of global bonds has made a large difference in the returns an investor experiences. For example, the Citigroup unhedged world government bond index returned -1.5% for the month, but when you fully hedge the same index the return is +2.4%.

Over the past 12-months to June 30, there is just on 6% difference between the unhedged and hedged versions of this Citigroup index.

Equity exposures in this category remain relatively light so the dip in the performance of the NZ stock market will possibly have little to no impact on the overall performance of the portfolios over the past quarter.

Funds with a greater global equity position could see the returns tempered. However, those global equity exposures that are either fully, or have a high hedging position, may not see any dip in their performance as the gains from the hedges may have offset any decline in the equity positions.

Since inception, and on a regular savings basis, the average of the top five conservative funds (excluding default funds) has produced compound annual returns of 4.9% after all fees and taxes. Over the past three years, that return is almost identical. The increase in the three year data from the last quarter has been as a result of the sharp increase in returns for the two ANZ OneAnswer fixed income funds.

Capital Guaranteed Funds

In addition to the mainstream conservative KiwiSaver funds, Westpac has five capital 'guaranteed' funds that were previously offered in this category. The funds are no longer open to new investments but we have continued to gather and report on their performance so you can compare these to the funds above.

Westpac has five plans and they all start at different times:

Capital protected      
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
% pa
since April 2008 X Y Z
to June 2016       $ % p.a. $
                 
Westpac CP Plan 1 C A Mi 25,125 12,317 8.6% 37,442 7.2%
Westpac CP Plan 2 C A Mi 21,879 9,355 8.4% 31,234 7.1%
Westpac CP Plan 3 C A Mi 18,518 7,169 8.7% 25,688 6.8%
Westpac CP Plan 4 C A Mi 15,053 4,812 8.2% 19,865 5.4%
Westpac CP Plan 5 C A Mi 11,842 2,807 6.3% 14,650 6.7%
---------------                
Column X is interest.co.nz definition, column Y is Sorted's definition, column Z is Morningstar's definition
C = Conservative, A = Aggressive, Mi = Miscellaneous

Please note: The Westpac Capital Protected Plans are not open to new investment.

Don't jump into capital protected funds unless you understand fully how they work in good times, and bad.

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 you life stage.

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

Our June 2016 review of the default funds can be found 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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Paltry returns, to say the least, compared to property.
What does that imply about the "Chicago Boys" risk to return hypothesis?
I know where I would put my money!

Hi Hevi, one of the things I have been banging on about from time to time is that some managers across the space are not adding value on an after tax and fees basis and our model is showing this up.

The other thing you should be considering is the risk adjusted returns for each of the managers.

Sometimes the top performing managers aren't the best ones either when considered on a risk adjusted basis as their returns could be driven by taking risky positions and getting lucky. You really have to analyse the data from all angles.