20 LISTENER MAY 26 2018
SOURCE: MORNINGSTAR, FMA KIWISAVER TRACKER
NEWSPIX
INVESTMENT
There are also few signs of a
return to significantly higher infla-
tion, which would justify higher
interest rates that would in turn
slow growth rates, although the US
Federal Reserve has been quietly
raising rates for the past three years.
Grant Hassell, managing direc-
tor and chief investment officer at
AMP, says, “I actually thought mar-
kets looked riskier a year ago when
bond yields were lower and equities
[shares] were at higher valuations.
“Since then, bond yields [interest
rates on tradeable, interest rate-
bearing investments] have risen to
be about 3% in the US and equities
have eased a bit, so if anything, the
current outlook is less volatile than
it was 12 months ago.”
That convergence “should pro-
vide a buffer to balanced portfolios
that might not have been there a
little over a year ago”.
But what a professional inves-
tor thinks is about to happen is far less
important than choosing the right type
of KiwiSaver fund. “For KiwiSaver account
holders, age and level of conservatism are
the main things to have in mind rather than
whether we’re going to have a downturn in
the next two or three years,” says Hassell.
The rule of thumb is simple: if you want
the money soon, invest in a conservative
fund. Its returns are unlikely to be spectacu-
lar because most of it will be invested more
or less as cash at the bank, but your original
nest egg is most unlikely to be smaller than
when you started.
If, on the other hand, you have a whole
working life ahead of you and are not plan-
ning to use KiwiSaver funds to help buy
a house in the near future, conventional
wisdom and almost any piece of investment
research will tell you to go for a “growth” or
even an “aggressive” fund.
In times of recession or political turmoil,your funds may lose value. But over a 20- to
40-year horizon, it’s almost unheard of for
a growth fund, which tends to have mostof its money in shares, to do worse than a
conservative fund, which buys only invest-
ments that pay interest. In fact, Gaynor
believes one urgent reform that would ben-
efit thousands of young KiwiSavers would be
to change the requirement for default funds
to follow conservative investment strategies.
“When you go into a default [fund] in
Australia, you go into a growth fund,”
says Gaynor, reflecting the fact that mostdefault-fund members will also be
young people with decades to go to
retirement.
He believes New Zealand opted
for a conservative approach to
default funds because then Finance
Minister Michael Cullen “was very
determined that it should get off to
a good start and that people weren’t
exposed to growth funds that lost
money straight away”.
That worked brilliantly. More
than 2.8 million people are in the
voluntary KiwiSaver scheme, “way
ahead of any forecast” and “confi-
dence in the scheme is very high”.
“I don’t think they did anything
wrong in the way they set it up, but
it’s now time to change that. Even
if it was just a balanced fund – it
doesn’t have to be growth,” says
Gaynor.
It may make sense for a young KiwiSaver
member to actively choose a conservative
scheme if they’re saving for a house deposit
and will need the money soon. Otherwise,
Gaynor says, “People under the age of 40
should not be in conservative default funds.”
Everett agrees. He has failed for two years
to improve the rate at which default-fund
members switch into a fund of their choice.
“I do think that default mechanism is
trapping people through inertia,” he says.
He’d like to find a way, which could include
penalising default-fund providers by cutting
their fees if a person stays in a default fund.
“So, don’t pay the provider, for instance,
if someone has been in the default fund
for more than a year. Just say you don’t
get to collect any fees. The only way this is
going to work is either completely change
the default mechanism or you find a really
blunt way of incentivising the provider to
get people to make a decision.” lFUND TYPE Conservative Moderate Balanced Growth Aggressive TOTALS
Cash up within 3 years 2- 6 years 5-12 years At least 10 years More than a decade
Total number of funds 21 19 25 26 9 100
Funds under management $11.3b $6.7b $10.3b $12.5b $2.5b $43.3b
5-year average growth range (post-fees) 5.6-10.1% 5.1-9.2% 8-12.1% 9.6-14% 10.6-13.5%
Average fees for top 3 funds 0.5% 0.76% 1.0% 0.96% 1.23%
Engaging investors: FMA chief
executive Rob Everett.Open banking would help
break down the tendency
for banks to get KiwiSaver
members by default.
KIWISAVER FUNDS UNDER MANAGEMENT