"We feel reassured that Pascoe Barton are managing our funds with utmost scrutiny and care..."

C & D

KiwiSaver Fund Performance Survey 30 June 2014

Most investment commentators when discussing KiwiSaver are concerned about the portion of funds invested in conservative funds. According to the latest Morningstar survey around 32.5% of the almost twenty billion dollars of KiwiSaver investments are in them.

Why is the portion so high? We believe it is because the default KiwiSaver funds are conservative funds. Currently over 27% of total KiwiSaver investments are in these default funds. These funds typically only have around 20% of their investment in what we consider the growth or more risky portion of their assets. In favourable market conditions, for growth assets, it effectively puts a very low cap on potential returns. Conversely, if share markets turn to custard, there is little downside risk.

The conservative asset allocations used for the default providers, are akin to what we consider appropriate for a defensive risk profile investor. Irrespective of the name that these funds are going by, there is around a 5% chance of a negative 4% return, and a 2% of a negative 10% return. We estimate that the forecast returns over a ten year period excluding fees would be in the region of 5.6% before fees and tax. Over the past five years the funds have averaged 6.45%, which was boosted by the yield decreases in the fixed interest investments at that time. The median estimated total fees charged by the provider excluding membership fees for conservative funds was 0.69%. However the fees ranged from 0.38 to 1.05%.

With conservative KiwiSaver funds in particular, the level of fees being charged has a major impact on the investors return especially if any government contributions are ignored.

KiwiSaver investors should consider if the fund they are invested in keeps within the risk parameters associated with the risk profile of the investor. For example one fund in January 2012 had around 45% of its assets in cash and fixed interest, and by June 2014 this was down to 13%.

Effectively investors who believed they were in a conservative fund eighteen months ago now find themselves in a fund more suitable for aggressive investors. Fortunately for those investors, the markets have been more favourable to the riskier investment assets compared to fixed interest over this time period. Regardless, the returns for the fund were somewhat lower than funds with a similar level of growth assets. Part of the reason may have been the high level of fees charged. The fees were also very high at 1.95%.

While fees can have a significant impact on investor returns, the key return drivers are the abilities of the underlying fund managers and asset allocation. The funds that seem to consistently perform well relative to their peers are those who use a multimanager approach. Those who use a passive fund approach have in general not performed as well as those who use an active investment approach.

Two easy methods of potentially improving your KiwiSaver returns are to make sure that you are taking sufficient investment risk to meet your target wealth goals at retirement. Secondly review the fund that you are in. If it is not performing, it is a relatively simple process to change either the fund or provider.

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.