By Craig Simpson
A theme of slipping returns is weaving its way through firstly the Conservative category and now the Moderate funds are showing signs the trend is continuing.
We have now seen over the past two quarter a majority of the funds in the Moderate category have long run or three year returns lower than where they were in March.
There are a couple of exceptions. Fisher Funds' Two Conservative Fund has made its way up the leader board and AMP's Moderate Fund has also climbed.
Generate Conservative Fund has the highest since inception returns using our regular return calculations, but keep in mind this fund has not been invested for the full period we are analysing. Generate came to market during a period of falling interest rates and an extended bull run for equities. Nonetheless what this fund has achieved in such a short time is very commendable.
Recent events, such as the Brexit vote, rumours around the financial position of German banking giant Deutsche Bank, and the US Presidential debate have all created additional angst and volatility.
With the Moderate category having a slightly greater exposure to equities and rising interest rates affecting returns from bonds, it is not surprising we are seeing returns slipping.
Over the past 12 months, all of the managers have posted positive before tax and after fee returns based on the change in their unit prices.
Our regular savings return analysis shows the gap between the performance of the top five moderate funds compared to the five default funds since April 2008 is closing.
Moderate funds have delivered an extra $1,900 in returns on average after-tax-and-all-fees.This is the same as last quarter but down from the $2,600 generated in the March quarter.
Moderate funds continue to add marginal value over the best performing Default funds. This poses an issue for those investors wanting a reasonably a slightly higher exposure to equities but at the same remain quite cautious and having a high degree of capital security. From a risk vs reward perspective, there is no compelling reason for an investor in a Default fund to move into either a Conservative or Moderate fund based on our analysis of the sectors.
Here is the comparison to September 2016 for Moderate Funds:
(EE, ER, Govt)
+ Cum net gains
after all tax, fees
= Ending value
in your account
last 3 yr
return % p.a.
|since April 2008||X||Y||Z|
|to September 2016||
|ANZ OneAnswer Cons. Balanced||M||B||M||28,805||12,701||7.2%||41,505||6.5%|
|ANZ Conservative Balanced||M||B||M||28,805||12,622||7.2%||41,427||6.5%|
|ANZ Default Conserv. Balanced||M||B||M||28,805||12,260||7.0%||41,065||6.7%|
|Fisher Funds TWO Conserv||M||C||M||28,805||10,941||6.3%||39,745||5.6%|
|ANZ OneAnswer Conservative||M||C||C||28,805||10,654||6.1%||39,458||5.8%|
|Fisher Funds Conservative||M||C||C||24977||8,177||6.1%||33,155||6.0%|
Observations and factors driving performance
The Aon Conservative fund has a considerable exposure to global bonds and this sector has outperformed domestic equivalents. Also, the international equity portion is 50% hedged which has provided some positive upside to their returns compared to an unhedged exposure. However, a fully hedged position over the past year would have added even more value to investor balances. The split between Australasian and international shares favours the more diversified global exposure on a ratio of approximately 2:1.
Like AON, all of the ANZ, ANZ Default and ANZ OneAnswer funds have a preference for global bonds over domestic holdings. The main difference between ANZ and AON is, ANZ has a sizeable holding in cash which is de-risking their portfolios and they have an exposure to property. ANZ are one of the few managers to consistently include property exposures within their portfolios.
Generate's performance has been helped by their exposure to listed property and Australasian shares. There is a concentration of NZ based assets and this sets Generate apart from the rest of the managers in this category.
Fisher Funds Two has some substantial holdings in Cash, NZ government stock and unlisted property (via Bayfield Mall). While the holding in Cash is substantial it is well below the target weight of 28% for this fund. The recent negative return from NZ government stock as interest rates have risen does not appear to have impacted the immediate performance of the fund - they have been one of the big movers up the leader board as we noted above. The unlisted property exposure will be helping to reduce the volatility of the fund as unlike listed property, which is traded on the market and effectively revalued daily, commercial property is valued less frequently and therefore, you do not get the day to day movements. There is a trade-off however, with a general lack of liquidity that results from owning bricks and mortar.
In their September newsletter to investors, Fisher Funds highlighted the success of their investment in jeweller Michael Hill which is up 60% since March this year, following a decision to have its main listing switch from NZ to Australia. The fund has had several investments record returns in excess of 5% in August while the NZX was coming off its highs.
The Fisher Funds Conservative fund, BNZ Moderate fund, and Generate Conservative fund have not been operating for the entire period and therefore their position in the table does not reflect their comparative performance versus other funds in the peer group.
Across the industry there is currently no consistency on how funds are categorised so readers will see funds with different risk descriptors (i.e. Conservative, Conservative Balanced & Moderate) appearing in the performance table. To learn more about how we categorise the various funds click 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.