KiwiSaver growth funds bounce back into positive territory

After a difficult 18 months KiwiSaver growth funds were the stand out performers in the quarter to June 30, 2009 producing a median return of 7.9% according to Mercer’s KiwiSaver Survey.

The best performing growth fund over the quarter was the Mercer High Growth Fund (+12.2%), while the Fidelity Life Growth Fund was the best performing growth fund for the past twelve months (-5.7%). Over the past year the median growth fund return was -12.6%.

Martin Lewington, Head of Mercer in New Zealand said the survey results highlights the folly of placing too much emphasis on the short-term returns of a long-term investment vehicle.

“Growth funds have struggled over the past 18 months but they were able to reap the benefits of a return of confidence in global stock markets over the past few months. Those investors who were spooked by the events of the global financial crisis and moved their savings to a more conservative fund will have missed the rebound in the markets.

“While conservative funds may have produced the best overall result for the past 12 months, it is likely that the majority of members would be better suited to a balanced or growth fund, which is expected to provide higher longer-term returns.

“The key outtake for KiwiSaver members is that while returns are important to consider, the salient point is to choose the type of fund that is most appropriate for your life stage and investment horizon.”

Mercer’s KiwiSaver Survey June 2009 is Mercer’s first survey to track the returns of KiwiSaver funds. The survey will be updated each quarter and will provides returns of funds covering four categories: default – which comprises the six KiwiSaver default providers and their respective default schemes; conservative – funds with a weighting of 20-39% growth assets; balanced – funds with a weighting of 40-60% growth assets and growth – funds with 61-100% growth assets.

  • The best performing default fund over the quarter was the Mercer KiwiSaver Conservative Fund (+5.4%), while the ASB Conservative Fund was the best performing over the last 12 months (+3.2%).
  • The best performing conservative fund over the quarter was the Mercer Conservative Fund (+6.7%), while the AMP Conservative Fund was the best performing over the last 12 months (+4.2%).
  • The best performing balanced fund over the quarter was the Mercer Active Balanced Fund (+9.9%), while the Fidelity Life Balanced Fund was the best performing over the last 12 months    (-0.1%).
  • The best performing growth fund over the quarter was the Mercer High Growth Fund (+12.2%), while the Fidelity Life Growth Fund was the best performing over the last 12 months (-5.7%).

Lewington said the survey should give funds and members a level playing field on which to compare KiwiSaver returns but noted that the returns stated in the survey are before tax and after management fees (gross of tax and net of fees).

“We have reported the returns in this way to give a comparison across all funds, but having said that, at Mercer we believe the most accurate method of comparing KiwiSaver funds is on returns after tax and fees. Reporting this way will enable members to know the exact return on their fund after tax has been deducted – this can vary significantly between funds and providers. But until all players in the industry report in this method, members will have to settle for a system of reporting after fees but before tax is deducted to make comparisons.”

Mercer also notes that improving financial literacy will help members better navigate the complexities in the system and understand the importance of selecting the most appropriate investment option.

“While reports such as this are important for members, improving financial literacy so that members can better understand and maximise their KiwiSaver scheme remains an important issue in this country – and we have an important window of opportunity to do so now.

“The Australian experience suggests, as the value of KiwiSaver funds increase members will take a greater interest in their fund.  We call it the ‘second-hand car phenomenon’ – when the value of the investor’s scheme reaches the value of a second-hand car investors suddenly take a lot more interest in the type of fund they are in and the performance of their fund manager.

“In this new financial year when members are attuned to the recent woes caused by the global financial crisis but also have now been contributing to KiwiSaver for a couple of years the impetus to improve financial literacy will be even greater,” Lewington concluded.

Geared KiwiSaver fund offers bigger returns – and risks

Grosvenor has launched a new leveraged fund to complement its current range of four multi-sector portfolios.

The Geared Growth Fund, which may be leveraged up to 50% of the net asset value of the fund, is aimed at those long term savers who are comfortable with using leverage to maximise investment returns, Grosvenor chief investment officer David Beattie says.

The fund was a natural fit not only with the philosophy behind the KiwiSaver Scheme, but also with the long-established principles of optimal investment portfolio design, he says.

“Many New Zealanders will already be quite familiar with the use of gearing and leverage relating to long term property investing, so gearing to buy other growth assets such as shares follows the same fundamental rationale,� Beattie said. “This is a particularly good time to make a geared option available, as both interest rates and share markets are currently very attractive from a long term fundamental perspective.�

“Indeed, it is now possible to implement a self-funding geared strategy, with borrowing costs effectively offset by the dividend income generated by the underlying share investments.�

All of the borrowing will be looked after within the fund itself, using non-recourse loans and active leveraging strategies to ensure that investors are never required to deposit any additional funds to cover liabilities or borrowing costs.

Active leveraging strategies will involve dynamically adjusting the leverage ratio between 0% and 50% over time, depending on some key variables.

Additionally, more advanced leveraging strategies, which use investment instruments such as call options and contracts for difference, may be used where appropriate.

On average, Grosvenor expect the Geared Growth Fund to boost savers returns by an additional 1-2% annually compared to a non-leveraged equivalent, provided savers are investing with a time horizon of least 15 years.

“For someone aged 30 now who earns the average wage and stays in the Geared Growth Fund for 35 years until retiring, this equates to an additional $470,000 at retirement,� Beattie said.

However, the new Fund option does come with some health warnings. “Obviously there are additional risks associated with any leveraged investments, with higher volatility of short-term returns the most visible,â€?  Beattie says.

In order to ensure that any potential users of the Fund are fully aware of the additional risks involved, Grosvenor will be requiring a specific signed acknowledgement from the member as part of the initial investment process with their financial adviser, or as part of any switching undertaken from existing investments.

White labelled KiwiSaver schemes under IRD spotlight

The Inland Revenue Department, which administers the government-sponsored superannuation scheme, is keeping an eye on distributors of KiwiSaver products to help avoid any confusion over where people’s money is being held.

It has received feedback that some KiwiSaver account holders were confused as to where their money was kept if they signed up with companies such as Mike Pero or NZF Money, both of which distribute products for Huljich KiwiSaver, but brand it to their own names.

It wants to help the public avoid “any confusion” over the difference between actual product providers and the distributors.

Spokesman Jake Harvey said the IRD wasn’t concerned about white-labelled products, but was keeping an eye on any potential areas that could be confusing for people.

“It’s mainly an information thing,” but the department will keep tabs on how distributors sell KiwiSaver products with more companies entering similar arrangements, he said.

 

Finance ministers to look at super portability, $16.6b in ‘lost accounts’

Finance Minister Bill English will discuss the portability of superannuation with his Australian counterpart Wayne Swan at their annual meeting on July 16, and the country could stand to gain a “considerable amount” of some $16.6 billion that’s held in “lost accounts” by Australian super schemes.

 

While the details are yet to be discussed, it is envisaged retirement savings with complying Australian super funds could only be transferred into KiwiSaver funds in New Zealand. Australia’s tax office last year estimated it had around $16.6 billion in superannuation accounts that it can’t account for, and English expects a “considerable amount of this money could belong to New Zealanders who have returned home.”

While there isn’t any data on how much money could potentially be repatriated to Australia, Craig Howie, a spokesman for the minister, said given KiwiSaver was a fairly new scheme and there are some 500,000 kiwis currently living across the Tasman New Zealand should enjoy a net gain.

New Zealand implemented the KiwiSaver scheme in 2007 and topped one million members long before the 2015 target date. The National-led government cut the minimum contribution rate to 2% of an employee’s wage when it came to power last year, a move lauded by ING as making the scheme more attractive. The Australian government passed legislation for compulsory super in 1992, lifting minimum contributions to 9% in 2002.

David Boyle, head of Kiwisaver distribution at ING, said New Zealand’s KiwiSaver funds should see “significant” gains from the move, with Australia’s scheme being embedded for some 17 years, but the “devil would be in the detail.”

“People will be quite motivated to repatriate funds to New Zealand, and the fund managers will of course be happy with that,” he said.

The government needs to take a “sensible” approach in organising any portability scheme, as the volume of paperwork will be very large.

An aging population is becoming a major issue for the global economy, and in its May Budget, New Zealand’s government suspended contributions to the Superannuation Fund, a separate fund to KiwiSaver, set up to help meet future payments to government pensions. Meanwhile, the Labor-led Australian government passed laws to lift the pension eligibility age to 67 by 2023.