Our comprehensive review of default KiwiSaver fund performance to September 2017, identifying who has the best long-term returns

By David Chaston

The New Zealand stock exchange reached a record high last Friday, October 13. And that is the culmination of steady rises over the past year for New Zealand listed equities.

During the three months to September 30, the NZX50 rose 4.2%. For all of 2017 it has risen 15.2%. Over the past year it is up 7.7%.

But if you are in a default KiwiSaver fund, you won't have had much exposure to this shift.

That lack of local exposure highlights the generally conservative nature of default KiwiSaver schemes. But most of these funds do have a reasonable exposure to international equities, somewhere between 10% and 20% (although there are exceptions usually to the lower side).

Generally those international equities have gained even more than the NZX50. Using the S&P500 as the benchmark, it rose 5.1% between July 1 and September 30, and it is up 19.9% over the year to September 30.

Most default schemes however are invested in cash, NZ fixed income, and international fixed income securities. These types of investments are leveraged to the interest rate and only really pay off when interest rates fall. (And that is because bond prices rise to reflect declining interest rates.) Interest earnings on these types of investments are always going to be very modest in the current environment.

With little change in rates since June, the second quarter impact on bonds has been similarly subdued. That means there has been little change in KiwiSaver default fund returns over the period.

But it also means the focus is squarely back on fund managers to pick an out-performing strategy and position in spite of the tame background conditions. They supposedly have the skill and ability to make the necessary selections and changes within their mandates. That is what they earn their fees for.

But there is scant evidence they are doing that successfully. A review below to the table column for the "effective last 3 year return percentage" shows some movement, even if the lifetime results aren't changing much.

Only BNZ recorded an improvement (+0.1%). Fisher Funds and AMP held their returns unchanged on this basis. But Mercer, (-0.1%), ANZ (-0.3%), and ASB (-0.1%) all recorded some slippage on this  three year measure from June.

KiwiSaver is a long-term investment and you should only apply a long-term judgement to its performance - even for default funds.

But these funds may not be as conservative as you imagine. Click on the fund names in the table below and you will find their asset allocations.

The returns to September 2017 are slightly lower than they were to June 2017, which should not surprise anyone given the market background. It was a slippage we suggested might happen in our previous review.

So you won't be able to grow your KiwiSaver nest egg much above average returns if you stay with a default option. But in theory, the downsides should be limited.

If you are not about to retire in the next five years or so, you should seriously review why you are in a default fund. We will review the track record performance of other classes of KiwiSaver funds over the next week or so, but being in KiwiSaver is a long term commitment and you should be applying long-term strategies to this investment. That may well mean accepting some higher level of risk to gain a higher level of returns. Over a long-term, that is usually a sensible strategy. Sure, bumps in the road do come around (like the Global Financial Crisis) and they can knock growth fund returns. But as we have seen post-GFC, the bounce-back can turbo charge your results.

Here is where these managers have your 'default' funds invested. 

If you want your money allocated differently, you will need to change funds, either with the same manager, or with another. But before you do that, get some proper investment advice from someone who understands your investment goals and tolerance for risk. That involves work on your part. But it's not a good excuse to just leave it there because it seems too much effort.

KiwiSaver default funds are only part of a broader range of conservative funds available. Many of the 'traditional' conservative and cash funds are under performing the default funds. We will look at the rest of the conservative funds in another article.

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 the appropriate advice, and for a substantive reason.