The tide is going out for investors in KiwiSaver Default funds as the heavy allocation in fixed-income securities risks valuation readjustment down, cancelling any gains in yields

By David Chaston

Returns for KiwiSaver default funds are sagging.

In our report to December 2017, the top fund generated from-inception average returns of 4.8% pa, after-all-fees, after-all-taxes. The average of the five funds who have been active since 2008 was 4.46%.

Three months later to March 2018 this had slipped to 4.6% pa on the same basis, with the five-fund average at 4.20%. In only 90 days, that is a relatively speedy retreat.

Focusing on just the past three year returns, the reduction is from 4.18% to 3.44%, which emphasises how quickly returns for these default funds are falling away.

Even though the global economy is still in a relative sweet spot, the asset allocations of default funds - with more than a third in "cash" and almost a half in fixed-income funds - are working against out-sized returns.  The international rises in bond yields are taking their toll on bond prices.

And since December 2017 the New Zealand currency has appreciated by +2.1% going from 70.9 USc to 72.4 USc. This has the effect of adding 2.1% to bond and cash yields that come from outside New Zealand (and in fact, the cash yields will be minor from 'outside NZ'), but also has the effect of depreciating the capital value of those bonds (the bond price) by -2.1% - which is on top of the discounting in foreign currency that would happen as yields rise. Half of the 46% of default funds invested in fixed-income is in overseas funds, so this effect is not insignificant.

Readers of this website will be well aware of the 'bondcano' risks - and default funds are certainly exposed.

Still, default KiwiSaver funds continue to beat benchmarks (see our December review), but that may be of little comfort if the market track is an outgoing tide.

The fund with the greatest slippage in the past quarter is the ANZ Default Conservative fund, one that has been near the top performer for most of the past 10 years. Mercer Conservative and AMP Default are slipping almost as quickly. At the other end of the scale KiwiWealth Default and Westpac Defensive, both relative newcomers, are slipping the least.

We have long argued that KiwiSaver members should transition to other non-Default funds that best meet their investment goals and match their tolerance for risk. Staying in a Default fund is unlikely to reflect anything but laziness to do the work to seek a change.

However, there is probably a case for savers/investors who are close to retirement and close to decumulating the funds, to stay. Default funds have a long track record of returning better long term returns than either Cash, Conservative or even some Moderate funds. So 60+ year-old investors might find it the right thing to stay.

For just about everyone else, however, there are good track records and other more forward looking reasons to reassess (or even assess) staying in these Default funds.

In an era of rising bond interest rates (which mean falling bond prices), you need to get on to that reassessment with a professional you trust.

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. The problem these days is that the averages, benchmarks and downsides are slipping.

* 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 March 2018      
$
% p.a.
$
       
 
 
 
 
 
Mercer Conservative C C C 31,116 7,887 4.6 39,003 3.5
ANZ Default Conservative C C C 31,116 7,281 4.3 38,397 2.8
ASB Conservative C C C 31,116 7,155 4.2 38,271 3.4
FisherFunds2CashEnhanced C D C 31,116 7,129 4.2 38,245 3.5
AMP Default C C C 31,116 6,230 3.7 37,346 3.0
                 
BNZ Conservative C C C 18,558 2,253 4.3 20,811 3.6
Kiwi Wealth Default C C C 13,814 1,009 3.6 14,823 3.5
Westpac Defensive C C C 13,814 978 3.5 14,792 3.3
Booster Default Saver C C C 13,814 944 3.4 14,758 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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7 Comments

and here is where the fees start to matter.

Good research as always, David, but one point I think is worth making....
The type of fund you opt for should depend not on when you retire, but when you will spend your superannuation investments in retirement. You may retire but need the money decades later. In the decade before I retired my fund manager would tell me about twice a year that I should move towards more conservative setting despite my explaining the likelihood of spending the money in under 15-20 years was low, so logically I needed to maximise value at that time, not at retirement age, and that obviously justified a “growth” setting.

On the other side of the ledger, for me kiwisaver is way too important to "invest" it in the stock market.
And to dismiss the GFC as something that was always going to be temporary is being rather, ummm
Audacious.

If you have a reasonable time horizon, over 10-15 years or so, the chances of a stock market crash lasting that long are extremely small. You are accepting the almost certain risk of making poor returns on your investment, and thus having to work longer or retire poorer, in return for avoiding what I consider to me a much smaller risk.

However the Stock market is so high right now that a severe reset is quite possible. On top of that the P/E is simply crazy.

You also have to gauge high returns v the risk of losses. Back in 2008 my main pension lost 28% and personally I dont think that was the main event.

Fair enough. A good point.

The point is risk v reward and P/E. So the capital value of shares bears little relationship to earnings, the gains are all in capital value its a ponzi scheme IMHO.

Ergo its not "insane" to go for a conservative fund the Q is when to jump into one, (I've jumped).