David Chaston checks to see if having your KiwiSaver in a bank-based fund hurts your returns. It does in two risk categories, not so much in the others

In our recent review of where New Zealanders have invested our KiwiSaver nestegg, we asked the question: Does our preference for using bank schemes help or hurt our returns?

That review found that two thirds of all funds are invested with a bank scheme.

We have almost $32 billion invested with bank schemes, and only $15 billion invested with other scheme managers.

Banks have one very powerful magnet working for them: the ability to report and display the fund balance and transactions, integrated into their ubiquitous banking apps.

That impulse has nothing to do with returns or results. So it is logical to ask the question: are KiwiSavers being hurt or helped as a consequence.

We used our deep database of regular savings returns that begins in 2008 to do this assessment.

Our database includes 159 separate funds overall, one of the most comprehensive reviews available. Clearly, your fund assessment will involve the particular institution you are with. This assessment is more general. We have looked at weighted returns for the top five funds in each risk category for bank-based ones, and non-bank-based ones. And we are only looking at track records, which is a backward-looking perspective. It is no guarantee of what will happen in the future.

This review concludes there is little overall disadvantage for being in the better bank funds, than the better performing non-bank funds.

But there are exceptions, which we note below.

    Top 5 Top 5
    Banks non-banks
Aggressive funds:    
Average returns:    
  since inception 8.382% 8.466%
  last 3 years 6.586% 7.446%
Weight: NZ$ bln $6.808 $3.232
  % of sector total 61.8% 28.5%
Growth funds:    
Average returns:    
  since inception 7.042% 6.754%
  last 3 years 5.332% 5.868%
Weight: NZ$ bln $6.121 $2.434
  % of sector total 61.1% 24.3%
Balanced Growth funds:    
Average returns:    
  since inception 6.240% 5.958%
  last 3 years 4.624% 5.075%
Weight: NZ$ bln $4.242 $1.915
  % of sector total 66.9% 30.2%
Moderate funds:    
Average returns:    
  since inception 4.654% 4.088%
  last 3 years 3.132% 2.974%
Weight: NZ$ bln $4.645 $1.635
  % of sector total 66.0% 23.2%
Conservative funds:    
Average returns:    
  since inception 1.740% 2.484%
  last 3 years 1.406% 1.942%
Weight: NZ$ bln $1.268 $1.034
  % of sector total 49.2% 40.1%
Default funds:    
Average returns:    
  since inception 3.825% 3.708%
  last 3 years 2.920% 3.030%
Weight: NZ$ bln $5.365 $3.402
  % of sector total 61.2% 38.8%

While it is pretty even overall, there of course are quite wide variances on a specific fund basis. You will need to inspect that detail yourself and our individual fund resources give you the basis to do that.

If you have your investment in aggressive risk funds, generally being in a good performing bank fund has come with a return penalty. Our estimate is that over the last three years, investors in bank-based aggressive funds have suffered a shortfall of about $180 million in returns.

For growth funds, our estimate is that these investors are about $100 million disadvantaged.

But there doesn't seem to be a material disadvantage if you are an investor in balanced growth funds, nor moderate, conservative or default funds.

Our conclusion: Banks may have a very strong, attractive platform advantage in winning your support which could disadvantage you if you want your investments in a growth or aggressive risk category. (You are generally better off using high performing non-bank schemes then).

But you suffer no practical disadvantage for the less risky categories.

(This review was for fund data up to December 2017).

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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Great article. A very pertinent piece of investigative journalism.

With the bank based aggressive funds performing worse that means those that are younger should not be in a bank based scheme. I've found trying to get any message across to younger kiwisaver members is tough. I know people in their 20s that have their kiwisaver in default funds.

I suspect by the time people become interested in their retirement it is going to be 20-30 years down the track with all the potential compounding gains lost. New Zealand needs to more aggressively get people engaged in looking out for their future.

My observation is that interest in Kiwisaver is doubling and redoubling rapidly. It was always predicted that as balances increased folk would start to sit up and take notice. Seems to be what is happening.

All default funds should be mandated as life stages funds which start aggressive and become more conservative each decade older you get. This would lead to far better outcomes for the uninterested.

Generate KiwiSaver Conservative returns 5.6% p.a. Not far off the bank based growth funds.

Just so it is compared on a consistent basis as all other funds in our analysis, we rank the Generate Conservative fund as #10 out of 20 in its category, with a since inception return after-all-fess, after-all-taxes of 4.14%. Over the past three years, that same fund ranks #2 of 20, with an average return of 3.66% pa.

You can see the details here

Our analysis is quite different to the official FMA analysis, or the Morningstar analysis, which are both point-to-point calculations. We use a regular-savings model.

Also, note we classify this fund in the "Moderate" risk category, despite its name, and the rankings above are for that category. To classify funds, we look at their actual asset allocations closely.

Oh after tax.

Excellent response DC

Thanks, David. Just to confirm, these rates are before accounting for fees?

No. They are our normal "after-all-fees, after-all-taxes" basis, using our regular savings model (so returns are averaged over a regular, growing contribution base, rather than the usual point-to-point others, including the FMA, use.)

Excl member tax credit I assume, because that is a fixed number and relies upon a greater than $1040 member contribution pa.

No. We include that (in the contrbution base.).

Thanks - Have you done any studies looking at the effect of fees as opposed to bank/non-bank?
I think that the low fee chargers like Simplicity will ultimately prove to be far better investments - they won't have a long enough track record yet to be in this study.

Getting 0.75% lower yield whilst saving 0.5% in fees still means that you lose money overall with simplicity.

No. Simplicity is just too new to be included fairly in our analysis.