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.

Default Funds      
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 % p.a.
since April 2008 X Y Z
to September 2017      
$
% p.a.
$
       
 
 
 
 
 
Mercer Conservative C C C 29,554 7,209 4.7 36,763 4.5
ANZ Default Conservative C C C 29,554 6,700 4.4 36,254 3.9
ASB Conservative C C C 29,554 6,504 4.3 36,058 4.2
FisherFunds2CashEnhanced C D C 29,554 6,410 4.3 35,964 4.2
AMP Default C C C 29,554 5,655 3.8 35,209 3.8
                 
BNZ Conservative C C C 16,996 1,926 4.5 18,922 4.3
Kiwi Wealth Default C C C 12,252 753 3.6 13,006 3.6
Westpac Defensive C C C 12,252 723 3.4 12,975 3.4
Booster Default Saver C C C 12,252 673 3.2 12,925 3.1
---------------                
Column X is interest.co.nz definition, column Y is Sorted's definition, column Z is Morningstar's definition
C = Conservative, D = Defensive

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. 

Allocation, approx. Mercer ANZ ASB FF2 AMP BNZ Kiwi
Wealth
Booster Westpac
  % % % % % % % % %
Cash 36 23 23 14 50 35 38 20 36
NZ fixed income 15 18 32 46 14 11 14 36 23
Intl fixed income 28 40 25 29 14 34 28 24 23
NZ/Aust equities 3 5 10 4.5 6 6   5.5 7.5
Intl equities 14 12 10 7.5 15 14 20 13.5 8
Listed Property 0.5 3           1 2.5
Unlisted Property 1                
Other 2     5          
  ---- ---- ---- ---- ---- ---- ----- ----- ----
  100 100 100 100 100 100 100 100 100

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.

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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5 Comments

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)

I made a similar point sometime ago related to the NZX50 outperforming most of the Kiwisaver funds and was rebuked by the interest.co.nz team. Couldn't really see the point in arguing the issue as basically arguing over which investment instrument has performed better seems a bit schoolyard.

I've fortunately been in Smartshares since their inception and accumulated on a monthly basis on my own prerogative, so I've benefited from the capital gains while opting out of Kiwisaver for personal reasons. More to the point, I did some analysis on FNZ through their annual reports and found that there are very few individual owners of the NZX50. Qualitatively, I think that Smartshares appear to have been a dismal failure without the involvement of institutions.

Taking a quick look at the ASB share trading platform, you can see that the volume of trading in the a2 Milk Company dwarfs the volume and value traded of FNZ. For ex, today 1,494K of ATM has been traded while only 55K of FNZ have been traded. Sure, you can argue that this is comparing apples and oranges. Actually, I think is potentially alludes to something possibly deeper and darker.

the other big issue in long term investment performance is fees...would be nice to see that reported as well

I have some money in several well known managed funds run by "experts". I also have a share portfolio which I buy and sell in my own name on the internet.
I am not an expert and have no formal qualifications in this field.
Comparing my portfolio with my managed funds, I have been rewarded far better with my shares than the managed funds and apart from brokerage fees I do not pay high fees as I do to the managed funds.

you would not be alone itsme...research on investment returns shows asset allocation (which classes of assets you invest in) and fees are major factors in long term performance

One big issue is the backend systems and competencies in place in the kiwisaver providers. An ANZ database error left one of our kiwisaver accounts ~$540 out (due to a logic error mixing up & misreading dates, basically a simple code monkey test could have caught this in the decade it was running). Turns out 2 weeks after notifying ANZ of the mistake they owned up to about 25,000 other people affected. The issue was not resolved in 4 months and required hours on the phone with them to fix. The test of different providers backends for simple basic system functionality & reliability continues, (5 so far, I will not go into the review of the others). Unfortunately at a personal cost if faults arise but on a small test capital rather than risking a full investment total or relying on using kiwisaver at all. As an investment vehicle it is a rather poorly placed as one that hides rather than provides transparency, effective control, further financial literacy & financial resilience for the general public. It certainly is more risky and prohibitive for those who need it to live on in their heydays and most dependent stage in life. While you might expect a bank to make small errors of a couple dollars or charge fees to that degree losing out on $540 is a rather large computer glitch for a single year. Their investment in technology and services seems too pitiful to the amount they put in to the managers and marketing. They lucked out being a default provider and one of the main business banks, so their user base is safe no matter how poorly they run their services or how frail and unsafe their system is. They cannot even be bothered to remove outdated redundant investment sites for ANZ or even to set up a basic redirect to the current one. These sites are open to serious errors and misdirection faults. To be a fly on the wall when their engineers have a bitch out session at the local pub would be too depressing.