On the back of buoyant and positive markets, our comprehensive review of default KiwiSaver fund performance to December 2017 identifies who is doing best

By David Chaston

The global economy is in an economic growth sweet spot. Everyone is making money.

So investors should expect their fund managers to be doing well.

But more than that, they should be expecting better-than-market returns. Professional managers need to show their worth by outperforming what passive investing can do.

And if there is any time that this should show, it is when investing conditions are good. Like now.

So that is our test for these KiwiSaver fund category reviews.

The benchmark returns we are going to use are;

- the S&P500
- the NZX50
- the NZ one year term deposit rate.

The S&P500 index started 2017 at 2239 and ended at 2674, giving a growth of +19% (plus dividends, less tax).

The NZX50 index started 2017 at 6881 and ended at 8398, giving a growth of +22% (plus dividends, less tax).

The one year term deposit in New Zealand offered 3.60% (bank average) at the start of 2017 (less tax).

So you would expect at least these returns in a managed fund.

Of course, all funds have different mandates and the weighting of investments depends on those mandates.

But we can make 80/20 estimates for each risk profile and what follows is for the KiwiSaver default set of funds.

Our benchmark KiwiSaver member started the year with $26,740 invested. Their contribution balance was added to by another $1,534 they invested directly, a further $1,533 contributed by their employer, and $521 contributed by the Government. That took their contributions up to $30,328.*

For a default fund, it would have to have grown by +5% tax-paid to beat the simplified benchmarks we have chosen. (that is, 82% of the portfolio is in fixed income securities, 18% is in equities). In dollar terms, that is a minimum gain of $1,430 from the manager's returns.

The good news is that all default fund managers added value in 2017. The manager with the best excess was ASB Conservative, adding $1,909 in value or +6.7% after tax and all fees. BNZ Conservative had a similar proportionate gain. At the other end of the scale, Booster Default Saver fund only added +5.4% in 2017, but at least it beat the +5.0% benchmark for this risk category.

Equally impressive for investors in these funds is how strong these one year returns are compared to the since-inception, and last-three-years' results. We do caution about using the one year result indications as a basis for shifting between fund managers. KiwiSaver investments are long-term commitments and only a change of a long-term view should motivate a review or a change.

Growth in returns should also have trended up over the year as investment conditions improved. And as we can see below, that was the case for almost all funds, although not all are achieving rising rates of return in the last three years. (If returns in the more recent period are lower than for the whole period, that is a strong signal that laurels are being rested on, which is not what you want to see).

Over the long term 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.

* Assuming they were in the fund from April 2008. These levels will be less for a later start, or for funds that were formed later.

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 December 2017      
$
% p.a.
$
       
 
 
 
 
 
Mercer Conservative C C C 30,328 7,876 4.8 38,203 4.5
ANZ Default Conservative C C C 30,328 7,431 4.6 37,758 3.9
ASB Conservative C C C 30,328 7,209 4.5 37,537 4.3
FisherFunds2CashEnhanced C D C 30,328 7,030 4.4 37,358 4.2
AMP Default C C C 30,328 6,366 4.0 36,693 4.0
                 
BNZ Conservative C C C 17,770 2,242 4.7 20,012 4.4
Kiwi Wealth Default C C C 13,026 1,007 4.1 14,033 4.1
Westpac Defensive C C C 13,026 955 3.9 13,981 3.9
Booster Default Saver C C C 13,026 950 3.9 13,976 3.8
---------------                
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.

*This article was first published in our email for paying subscribers. See here for more details and how to subscribe.

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