We review the performance of KiwiSaver growth funds and find our previous expectation they might struggle quite wrong. Results are on an upswing again

By David Chaston

We last looked at the performance of KiwiSaver growth funds six months ago and thought we sensed a time when these returns were topping out.

From September 2017 to March 2018 there was a sag in high returns across all funds and managers.

But six months on, to their credit, and perhaps more due to extended growth in all the major economies, these returns have picked back up. And more managers are scoring improved returns.

For the three years to September 2017, the best five funds in this category achieved an annual after-all-fees, after-all taxes average return of 7.8% pa. To March 2018, that had slipped markedly to 6.2%.

To September 2018 however, the recovery is solid, rising on that basis back to 8.1% and the best we have ever seen it for growth funds. Some managers, and BNZ, Generate and Fisher Funds stand out here, have seen their investment allocations pay off handsomely, really moving the needle for last-three-year returns. Check their allocations below because each is different. Clearly these managers have been making good choices on specific investments within these broad assignments.

At some point, the run will come to an end, even if it still looks unlikely now. We are now into the ninth year after the bottom of the previous cycle and that means the current growth period is longer than many other previous business upswings.

But the point is, you are well advised not to switch out of a growth fund even in the face of expectations a correction, or worse, might be coming. The key point is that you won't be able to pick when it happens, and further, any downturn is likely to be relatively short (a few years?) and you won't be able to pick when the upswing happens. Being there for the upswing is where the turbocharged returns happen. Be a long term investor.

The growth fund with the best 10 year track record in our analysis now reports a +9.3% pa cumulative gain. The next best reports +8.2% pa average. More than half of the KiwiSaver funds we track in this growth category have delivered since inception gains exceeding +7% after-all-fees and after-all-taxes. All of the growth funds we track that started later than April 2008 are in this better-than-7% category as well.

If more default savers had listened to the standard advice from investment professionals they would now have substantially larger portfolios than they actually have by channeling the fear.

By March 2018, our standardised investor who started in April 2008 as a 28 year-old on a median income has almost $55,000 in their growth account if they were with the fund with the top track record. That is more than +$12,500 in gains over staying in the best default fund - where the member contributions are identical. $12,500 is the cost of being conservative in the past decade, and cannot be won back by switching now.

Actually, it is more dramatic than that. The best growth fund has earned $21,225 after-all-fees, after-all-taxes. The best default fund has earned $8,613 on the same basis over that siince-inception period. No kidding. That is real money and the difference means it is worth your time and effort to ensure you are in the right category, and in a fund in that risk category where you have confidence in the manager.

Unless you are close to needing the funds for retirement living purposes, even with the recent market questions, good growth funds continue to impress from an investment point of view.

Here is the track record of KiwiSaver growth funds using our unique regular savings analysis. Click on any fund name to get even more detail on its performance, ranking, and allocation.

Growth 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 2018      
$
% p.a.
$
                 
Aon Russell LifePoints Growth G G G 33,253 21,225 9.3 54,478 9.3
Aon Russell LifePoints Balanced G B B 33,253 18,139 8.2 51,392 8.0
ANZ OneAnswer Balanced Growth G G G 33,253 17,430 8.0 50,683 7.3
ANZ Balanced Growth G G G 33,253 17,278 7.9 50,531 7.2
Fisher Funds Two Growth G G G 33,253 17,156 7.9 50,409 8.9
AMP ANZ Default Balanced Growth G B G 33,253 16,583 7.7 49,836 7.1
ANZ Default Balanced Growth G G G 33,253 16,266 7.6 49,519 7.3
ASB Balanced G B B 33,253 15,086 7.2 48,339 7.2
Aon ANZ Default Balanced G B B 33,253 14,840 7.1 48,093 6.2
AMP Growth G G G 33,253 14,689 7.0 47,941 8.6
QuayStreet Growth G G   33,253 14,482 6.9 47,735 6.8
Westpac Balanced G B B 33,253 14,471 6.9 47,724 6.6
Kiwi Wealth Balanced Fund G B B 33,253 13,568 6.6 46,821 6.0
Mercer Balanced G B G 33,253 13,355 6.5 46,608 6.8
QuayStreet Balanced G B   33,253 12,202 6.0 45,454 5.8
AMP Balanced G B B 33,253 11,937 5.9 45,190 6.8
QuayStreet Balanced SRI G B   33,253 10,589 5.4 43,842 5.0
                 
Booster Balanced Growth G G G 27,939 10,524 7.6 38,463 8.2
BNZ Growth G G G 20,695 6,075 8.8 26,770 9.8
Generate Focused Growth G G G 20,302 6,291 10.5 26,593 10.1
QuayStreet Altum G B   15,202 2,858 8.3 18,060 8.7
Mercer Growth G G G 14,031 2,250 7.8 16,281 8.3
-------------------        
Column X is interest.co.nz definition, column Y is Sorted's definition, column Z is Morningstar's definition

G = 'Growth', B = 'Balanced', A = 'Aggressive'

Booster was formerly Grosvenor and QuayStreet was formerly Craigs Investment Partners

But there is a downside, one we have highlighted in a previous review. And that is a third of the funds in this category seem to underperform - well they have to date. But that group is shrinking with only nine of 22 now holding after-all-fees, after-all-taxes returns under 7% in the last three years.

Growth funds should out-perform balanced growth, moderate, default and conservative fund returns. But the stark fact is some of these growth funds haven't managed to do that against the best of those lesser-risk funds in the past 10 years.

Choosing wisely is important.

Here is where these funds are invested. Fixed income elements will be bonds with less than top credit ratings (although most will still be 'investment grade'). Equity investments are the bulk of these portfolios, although there will be more capital-gain plays than dividend-yield plays. And property funds and alternative assets get a reasonable allocation here too.

Growth Funds ------ how allocated, approx. ------
as at September 2018 Cash NZ fixed
income
Intl fixed
income
Equities Property Other
Aon Russell LifePoints Growth   5 20 75    
Aon Russell LifePoints Balanced   8 32 20 40  
ANZ OneAnswer Balanced Growth 10 8 16 55 10  
ANZ Balanced Growth 10 8 16 55 10  
Fisher Funds Two Growth 13 13 4 63 6  
AMP ANZ Default Balanced Growth 10 8 16 55 10  
ANZ Default Balanced Growth 10 8 16 55 10  
ASB Balanced 5 10 24 59 1  
Aon ANZ Default Balanced 4 10 25 41 10 9
AMP Growth 12 4 6 72 5 1
QuayStreet Growth 17 8 4 70 1  
Westpac Balanced 7 15 19 47 5 6
Kiwi Wealth Balanced Fund 12 10 23 49 1 4
Mercer Balanced 15 9 18 41 6 11
QuayStreet Balanced 24 17 7 51 1  
AMP Balanced 16 12 14 54 4 1
QuayStreet Balanced SRI 22 15 10 53    
             
Booster Balanced Growth 6 9 8 69 8  
BNZ Growth 8 5 18 69    
Generate Focused Growth 12     76 12  
QuayStreet Altum 19     80 1  
Mercer Growth 9 5 11 57 6 12

At this end of the risk spectrum, historical track record is a little less important than understanding the strategy for the future. But that is hard for an individual fund participant and requires dedicated work and a background to understand what the manager is really trying to achieve. To a large extent, you are trusting the manager, and that is where the historical track record is usually fallen back on. That is an understandable reaction by fund investors even if it can't be rigorously justified.

The more risk you want to take on to get access to superior returns, the more work and knowledge you need to have to choose the right growth fund. If you don't have that sort of background, at least engage an experienced, qualified adviser you trust.

------

For explanations about how we calculate our 'regular savings returns' and how we classify funds, see here and here.

Across the industry there is currently no consistency on how funds are categorised. We have found that sometimes the fund name can be misleading and it is important to completely understand what drives the funds performance (asset allocation, investment philosophy etc) and be aware of how the underlying portfolio of securities is made up and where the potential variability in monthly or annual returns may come from.

To learn more about how we categorise the various funds click 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 appropriate advice and for a substantial 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?

We welcome your comments below. If you are not already registered, please register to comment or click on the "Register" link below a comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.

26 Comments

Very good. Unless you’re close to retirement, aggressive funds are the way to go in my opinion, come rain or shine.

Been in the Generate Focused Growth ever since I signed up, withdrew for house purchase but it'll stay as an aggressive fund until I retire. .

This is a winning strategy I think.

Edit: I’ll probably switch to some form of conservative fund 5 or so years before retirement.

Nzdan

You spend enough time on this site to have a go at investing yourself, and you're smart enough too. I challenge you to reduce your kiwisaver deposits by a third and use that third to pick stocks yourselves, learn about the market, sentiment and valuations and I will wager that in 10 years your third will have overtaken your kiwisaver returns.. Reason being, you will take time to invest in what you see as opportunities rather than just investing because you have a load of funds to place this month and have to buy something. Sometimes buying nothing is a sensible option so you can load into a purchase when you feel its good value to do so.

Yes, understanding the nuances of international markets is simple and easy, no need to rely on a qualified expert to invest for retirement, just do it yourself. Same goes for dentistry, ay Nic?

BulLSHit.

It is actually very easy... Housing markets fund the credit for growth in everything, get ridiculous and then peak and then slow down. Stocks and smart money take the warning that it was all daft so the sensible cash out while the market crashes and for those that are in managed funds they take the retirement hit that means they will still be working at 70 but it does keep them focussed on the 9-5. After that you have a slower crash over 3 -5 years in housing whilst people dig in and savings return to the more productive enterpirses, earnings and pay rises and credit remain under pressure whilst the stock market very slowly recovers.. Housing hits bottom, gradually recovers for it all to happen again a decade down the line... 1988, 1998, 2008 and 2018 are the lucky numbers for those that cashed out before the 8.

If you know want you're doing, then you never need anything other than a annual polish from the dentist because you're not damaging them by grinding your teeth in your sleep with worries over debt levels.

Ramblings of a madman.

Some learn from a few sources and some lessons from history, others take their advice solely from Ashley Church...

And some just blurt out whatever disjointed ramblings their inner monologue happens to be telling them at that particular moment, based on nothing more than their own emotions and/or the conspiratorial woo woo they happen to read on the internet earlier that day.

BulLSHit

https://www.telegraph.co.uk/business/2018/10/25/will-no-mercy-central-ba...

'There will be no mercy from central banks until asset prices fall much lower'

IIRC Dan has a wife and a toddler, he's probably not got time to sit down and research companies properly to play the stock picking game. It takes a good 20hours per company to get your handle on everything you need to know to decide whether they are worth a long term investment. It's not a 5 minute job.

Correct. At this stage spare money that could be used for investing is going straight on reducing the mortgage, but certainly something I'll be having a go at later on down the track.

I know very little about investing or financial markets so I'd be better off playing the pokies at the moment. I find this site is a good source of information (both the articles and comments section), particularly AndrewJ he tends to provide some good links.

I figured if I show an interest in what's going on in the financial markets and gain an understanding of why and how things happen then when I'm ready to have a go I'll be better prepared.

If you want to start learning about how to pick companies to invest in long term, anything about Warren Buffett, Ben Graham is a good place to start. Phil Towns rule 1 investing YouTube videos/podcasts are a good primer.

Just remember equity markets world wide have risen pretty much in a straight line at very high rates since 2009 which happens to roughly coincide with Kiwisaver start up.

Buy the S&P 500 and go to sleep was a wonderful strategy. The CEO of the Cullen fund has been seen as a walk on water investor - yet their returns vs S&P 500 index are not so wonderful at all.

Let's see what returns look like after a prolonged downturn of which there were 2 periods in the last century where in real terms the US market did not return to previous levels in real terms for over 25 years.

Schiller's " Irrational Exuberance " has the graphs.

"Just remember equity markets world wide have risen pretty much in a straight line at very high rates since 2009 which happens to roughly coincide with Kiwisaver start up."
Exactly. I moved mine to cash a few months ago. Only time will tell if that was a wise move, and of course there's the corresponding timing for the switch back to aggressive...for which I'm in no hurry.

This article is probably about a month too late.
It's about to tank.
My aggressive fund has lost just under 10% in the last 3 weeks. The balanced one 5 %.
It takes a lot of slow upside to reverse these types of losses, but my feel is that the good times have gone.

https://www.youtube.com/watch?v=lvEHDn6EakM

For those that ride the dips and the crashes and always leave their futures in the hands of the fund managers!

Are you retiring in the next 10 years? If not, why do you care that it lost 10%? In the long run the aggressive fund will almost certainly outperform the balanced.

What fund lost 10%?

The news on the street is that things always bounce back and the dream of perpetual wealth/debt creation is kept alive.
https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=121...

Look at it this way, you now get 10% more for your contributions.

My Milford is down about 7%; active growth fund-ouch++, and it was about 30% cash and bonds, so a lot of stocks-only aggressive will be down 10%.
Agree article is dated.
Title should be "Growth funds out of puff; Apnoeic and Cyanosed!!; despite all the money printing CPR and interest rate cutting shock treatment.
We will see how correct those who believe stocks always go up in the long run are, I've been a believer but am feeling rather nervous now, ? another 10--20% to go, or ? flatlining

This article is out of date now (Figures to end of September 18). it's been a bloodbath for growth funds this month with three days to go.

If houses had fallen by this much there would be 1000+ comments here..

True but I'd also say there are 10000+ more people investing in property rather than investing in funds

1.3 million Kiwisavers invested in funds; but maybe Interest.co.nz viewers all do property, no shares?

Yes I try to ignore these downs I look at the how funds have performed over the last 10+ years (including GFC) and most growth and aggressive funds are still good despite some having bad years. Its call volatility