KiwiSaver Turns Four

KiwiSaver has this month turned four. Currently there are around 1.75 million members, whose investments are valued at close to $9 Billion. Of this, around 40% of the amount is from the government’s contribution, 40% from the employees and 20% from employer’s contributions. The numbers are well above the level expected when the scheme was first announced.

One of the most surprising things about KiwiSaver is that the vast majority of investors have largely signed up to investment funds where there has been no independent research. Currently, there is only one fund that has been independently researched! All AFA advisers are supposed to use research on investments that they offer. This can be carried out by the adviser, but most will not have the research skills of a dedicated Fund Manager Research house such as Morningstar or Lonsec.

Our experience shows us that it is very difficult to make meaningful fee comparisons between the various funds. There is no consistency on how they are expressed. We also know that fund managers may be for example good share managers, but poor fixed interest managers. Because of this, our preference would be to use KiwiSaver funds that take a multimanager approach. That way you will get specialists in each category of investment assets managing your savings. Think about this from a medical profession approach. You see an orthopaedic specialist for orthopaedics, a cardiologist for heart conditions, and a skin specialist for skin conditions. Your GP makes a general diagnosis and refers you for specialist treatment.

When we look at the numbers, on average each investor has just over $5,000 of KiwiSaver investments. There will be reasonable numbers of investors who have over $15,000 worth of investments. For investors with less than say $20,000 worth, the major driver of investment returns has been the government’s contributions. The performance of the actual funds has largely been immaterial.

As KiwiSaver balances grow, investors will become more interested in investment returns. We expect to see increasing interaction with authorised financial advisers to check that the investor’s contribution levels and other savings are sufficient to meet retirement goals. The AFA should also be able to advise on changes to portfolio managers, and investment mandates and the selection of an appropriate KiwiSaver provider for the investor. These should all be reviewed on a regular basis.

With the government’s contributions being reduced this year, and the investors balances increasing, greater focus should be taken regarding the actual fund the investor invests in. It needs to be appropriate to the stage of life that the investor is in. In other words the asset allocation (and the underlying investment risk) should first be assessed and would be expected to change with the investor’s age. That is investment risk tolerance should decrease as the investor gets closer to retirement.

When we look at the performance of the various funds’, fund rankings can change dramatically over a quarter or a year; i.e. a fund that may have been a top performer last quarter, could well be a bottom performer the following quarter. But we should not be looking at short term performance. KiwiSaver by its very nature is a long term savings scheme for the majority of investors. The monies are locked in currently until the investor turns sixty five, except for genuine hardship or first home purchases.

We have seen one KiwiSaver fund manager announce that they are bringing all their international share fund management back in house. That is, they have decided to fire their outsourced international share fund managers. We would question whether they have the skills or resources to do this. The driver for this change may be to increase profits by decreasing management costs. An alternative could be to simply buy some cheap index funds (which they can do in-house) and probably increase their margin on the international share management component by close to 0.45%. If they do this, it will be a major change in the investment mandate that their investors signed up to.

We would suggest that if your KiwiSaver account balance is over $15,000 and you expect to be saving into it for a number of years, then you should have your KiwiSaver investment reviewed by an authorised financial adviser who can advise on a wide range of investments. There may be a small charge for this; however it could be worth thousands of dollars to you at retirement.

Disclaimer

Steven Barton (FSP 32663) and Susan Pascoe Barton (FSP 32382) are Certified Financial Planners and Authorised Financial Advisers.  Their initial disclosure statements are available free of charge by contacting them on (07) 3060080 or they can be downloaded from www.pascoebarton.co.nz. This column is general in nature and should not be regarded as personalised investment advice.