Talk Money with Tony Field – October 23, 2015


If you are invested in KiwiSaver and have checked your balance lately it is likely you will have noticed it has slipped in value.

Morningstar says most KiwiSaver funds lost ground in the three months to September.

This was a period in which markets fell due to the concern about the Chinese economy.

Developed sharemarkets lost 3.09 percent (in New Zealand dollar terms), while developing markets slumped 13.08 percent. The S&P/NZX50 finished down 2.33 percent and Australia's S&P/ASX200 lost 9.76 percent.

Retirement funds with a larger exposure to cash and fixed interest investments did better than those with a larger weighting in shares (equities).

Morningstar says conservative KiwiSaver funds produced an average return in the three months to September 30 of 0.20 percent. Aggressive funds were the weakest performers, falling 4.47 percent.

Conservative funds have more exposure to cash and fixed-interest investments like bonds. Aggressive and growth funds have most of their money invested in shares. Balanced funds have a mix of both shares and fixed-interest investments.

This was the first quarter since 2011 in which most KiwiSaver funds lost ground.

If you look at the five-year performance it tells a different story.

Conservative funds grew by 6.2 percent per annum on average. The aggressive funds gained 8.5 percent per annum. The best performers were the growth funds, rising 9.5 percent per annum on average. Default options grew 5.9 percent, moderate funds rose 7 percent and balanced funds grew 8.3 percent per annum on average.

The returns for three years were even better.

Aggressive funds were the best performers, rising 11.9 percent per annum on average.

Growth funds rose 11.5 percent per annum and the conservative funds rose 6.6 percent per annum.

Default options rose 6.2 percent per year, moderate funds gained 7.3 percent and balanced funds gained 9.7 percent.

The right fund for you

The last few years have seen world sharemarkets do very well. It is likely that the returns in the next few years will not be as good as those we have seen in the past three to five years.

So what is the right fund for you?

You need to think about your age and tolerance for risk.

Recently KPMG released a report on the funds management industry.

"As a rule of thumb, if you are aged between 25-40 you should be more disposed to a growth fund; as you have plenty of time to earn at a higher level and recover should the market fall," says head of financial services John Kensington.

"If you are a little older, you might lean toward a balanced or growth fund.

"People who should be in a conservative fund are those who are nearing retirement age and wanting certainty around their capital – but even then, they might want to split their risk."

Morningstar contributed to the report. It said that it believed many New Zealanders were being too passive about the potential returns from their KiwiSaver investments.

Morningstar said there was an unnecessarily high concentration of KiwiSaver money invested in conservative funds. That is mostly because people who join a default provider and do not select a fund category will be placed into a conservative fund. They can opt to choose their own category, but many do not.

There is research showing that some people do not know the fund category they are in. If you do not know it is worth contacting your provider to ask them to explain what type of fund you are in and whether it is appropriate for your age and risk profile.

The Commission for Financial Capability's David Boyle wrote in the KPMG report that "making sure a member is in the right fund is paramount".

"Not the right provider – the right fund. Default members will be in a conservative fund, which means that over the long term they will generally experience a lower return."

The growth of KiwiSaver funds

We now have more than 2 million people in KiwiSaver. Many of them make regular monthly contributions, bolstered by employer contributions and an annual Government tax credit.

In June 2008 KiwiSaver funds totalled $954 million. Now the funds invested in KiwiSaver total just over $29 billion.

Here is my talk with Paul Henry about the report.

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