Slow Start for KiwiSaver Returns

A number of KiwiSaver investors may have seen what appeared to be disturbing news in last weekend’s NZ Herald.  An article pointed out that one of the default providers had 24 KiwiSaver products, and that 20 of them had lost value since the KiwiSaver Funds received their first monies.  If the report writer had any real knowledge of investment markets and KiwiSaver, it should not have been a surprise at all.  Firstly, the investment time period was only three months, and secondly share markets performed poorly throughout most of the developed world in the last quarter of 2007.

Any investor who has joined KiwiSaver, or indeed virtually any investment fund, where shares make up more than around 20% of the asset allocation is likely to experience negative returns at some stage that they hold the investment for.  Our Asset Allocation Research House, estimates that the frequency of years with negative returns is 1 in 2.7 years for New Zealand and Australian Shares, 1 in 3.3 years for International, 1 in 3.8 for listed property and for A rated or better fixed interest of a five year duration, 1 in 19.8.  For a mix of 50% BBB, 35% BB and 15% B fixed interest this reduces to 1 in 5.7 years.  Cash is the only investment without negative returns.

If we put this altogether in a portfolio type scenario, then for most KiwiSaver type schemes, the frequency of negative returns is likely to be in the range of one year in 10.7 to one year in 4.7.  As most contributions to KiwiSaver are monthly, there is always going to be dollar cost averaging going on, as the unit prices will be constantly changing with overall market conditions.

As we have said in previous articles, differences in fee levels may well be the major difference between providers of similar KiwiSaver products, rather than the ability of the various managers’ underlying fund management performance.  Over a ten year period for those with similar fee structures, the differences may prove to be insignificant.  Even then, it will be academic, as only a smidgeon of funds will have been invested continuously over the full ten years.

When investors are getting closer to the time they will need to rely on their investments to provide sufficient income to fund their retirement, they should seriously consider how much investment risk it is prudent to take.  Some by nature are risk takers, and will not accept the relatively lower level but consistency of returns provided by good quality fixed interest and cash investments.  Some see shares as being the great elixir with the prospect of high returns.  That may be fine, until the share market falls dramatically.  The reality soon bites, when they realise that their investments have fallen in value by 20 or more percent. 

Over the next ten years, on a forecast returns basis, there is very little difference in returns for portfolios of different levels of investment risk.  These forecasts are made on an index basis.  During the ten year period, there will be major differences in returns between the various portfolios.  The important thing is that the return be sufficient to meet the long term needs of the investors.  If there is a shortfall, something will need to give, and that most likely will be the level of retirement extras such as travel in retirement.  If there is a surplus, then it is great news.  There could be more travel, the ability to help pay for your grandchildren’s education, or a nicer house etc.  The fact that your first month’s contribution to KiwiSaver made a loss or not is irrelevant.  The key is saving in the first place.