Is your KiwiSaver manager diversified?

Michael Lang looks at KiwiSaver asset allocation and discusses the benefits of diversification.

Over the last decade New Zealand shares outperformed global shares by 120%. New Zealand shares now trade at a premium to their global counterparts.

Whether your KiwiSaver manager favours local shares over international ones has been an important determinant of historic relative performance, and if history is any guide, it is likely to continue to be so. Despite this there is a paucity of research on local managers’ asset allocation.


The basic problem is something called home bias. Investors and managers the world over prefer companies that are listed on their home exchange. These companies follow local laws and regulations, report and are reported on locally, and raise capital and hold AGMs locally. They are therefore easier to follow than their  international counterparts.

In some countries a home bias is more than the warm fuzzies. In New Zealand for instance, the tax regime provides advantages for local investment. For example, Australasian shares are not taxed on capital gains and New Zealand shares enjoy the benefit of imputation credits, removing the potential for double taxation on company distributions. Outperformance during the most recent decade has not hurt allocations either.


Despite this, there are compelling reasons to be globally diversified. It rarely makes sense to put all your retirement eggs in one basket. When the New Zealand economy faces a regional downturn, as occurred during the Asian crisis of 1997, it is useful to be able to draw down on a portfolio of strongly performing global shares.

Whether managers use risk-parity, minimum-variance, mean-variance, or the more sophisticated Bayes-Stein or BlackLitterman, the conclusion is broadly the same – the right allocation to international shares increases clients’ prospective returns, or for the same level of return reduces their risk. 


One way to work out a portfolio’s optimal Australasian share exposure, is to look at volatility (or variance) instead of return. New Zealand shares will always have a tax-based return advantage but this does not always manifest itself in superior returns – for example, from 1994 to 1999 international shares returned around twice as much as New Zealand shares.

Using minimum-variance to optimise asset allocation gives a range of technically superior allocations – all of which are broadly equal – and shows what is not optimal. The optimal range extends from a minimum allocation to Australasian shares of around 30% where the SuperLife Growth Fund, NZ Funds LifeCycle – age 0-54 and ANZ Growth Fund sit, to a maximum of 55% where the Milford Active Growth Fund is positioned. Funds outside this range are, on this analysis, sub-optimally positioned, most notably the Kiwi Wealth Growth Fund – although the Juno Growth Fund, Mercer Growth Fund and Booster Asset Class Growth Fund also sit outside
the optimal range. Nevertheless, they may have performed well historically. How funds perform in the future will, to a large degree, be determined by their asset allocation. 


Disclaimer: Michael Lang is Chief Executive of NZ Funds and his comments are of a general nature. New Zealand Funds Management Limited is the issuer of the NZ Funds KiwiSaver Scheme. A copy of the latest Product Disclosure Statement is available on request or by visiting the NZ Funds website at


Generate: Advisers dealing with questions

KiwiSaver provider Generate is encouraging advisers to refer clients who are worried about its recent hack back to its website.

It revealed last week that there had been illegitimate access to its systems. Data about 26,000 members, including their ID documents and passwords, was accessed.

“We know that advisers are fielding questions from clients about this incident, both from affected Generate members and others. We want advisers to know that having taken immediate steps to secure our systems, we are working very hard to assist their clients who were affected,” said chief executive Henry Tongue.

“On Wednesday, as we were sending emails to all our members, letting them know whether or not their personal information was involved, we also contacted all the subscribers to our advisers’ mailing list, alerting them to the incident and recommending ways they could assist their affected clients.”

He said advisers who had clients in the scheme should ask them to log into their Generate account so they could see what information was involved.

They should also go to the website for steps to take to prevent harm.

"Advisers can also assure their clients that this incident affected our online application system information solely, and not our members’ KiwiSaver or other investment accounts, or the investments themselves, which are held in a completely separate system.

"As an organisation we take the protection of our members’ data very seriously. Unfortunately, as advisers will know, malicious attacks of this nature are becoming more common both in New Zealand and globally, so constant vigilance is required, which is why we are taking longer term steps to further strengthen the security of our systems. This is a key priority for us alongside continuing to perform strongly as an investment manager to deliver results for our members.”

Life stages research shows big differences in outcomes

Lifestages funds are a better option for savers than default KiwiSaver funds, but they’re not all created equal, new research from MyFiduciary suggests.

The research was commissioned by NZ Funds and reviewed the lifestages options available in New Zealand.

Nine out of 22 KiwiSaver managers offer a lifestages option. These reduce the level of risk an investor is exposed to over time.

David Rae, an investment consultant and principal at MyFiduciary said the research found that the average fund was too conservative overall and started de-risking too early.

There are two main approaches to lifestages investment – one makes small regular changes to asset allocation while the other undertakes less frequent but bigger steps. AMP, ANZ, Generate and Lifestages opt for the latter.

Bigger steps could be a problem if rebalancing coincided with a bad time for the equity market. Rae said a smoother approach was much better.

But he said in general any lifestages approach was better than a single setting for an investor’s overall outcome.

“The right investment allocation for a 25 year old is very different o a 65 year old … you’ve either got to be pretty active through your investing life to make sure you are getting the right setting … or you do it automatically through a lifestages approach.”

The Government has proposed requiring default KiwiSaver funds to take a lifestages approach.

Rae said this would be an improvement.

People were more likely to choose a lifestages option than to opt for a high-risk investment fund if presented with a menu of options, he said, and default funds would never be set at the 80% growth allocation that would best suit many young investors.

But they could be delivered those results through a lifestages fund.

Early de-risking remained a problem, though.

The research showed that ANZ had people in zero growth assets at 65, despite potentially having another 30 years to live.

Some started to dial down risk when investors were in their 40s, Rae said.

“In terms of total accumulation of wealth through the life cycle that’s early in dollar terms.”

MyFiduciary modelled a person who starts saving at age 25, has an income of $75,000 that grows through time, and saves 4% of their income (plus a 3% employer contribution).

The average of all balances at 65 was $426,000.

Savers who chose NZ Funds, Fisher Funds or SuperLife achieved a higher level of expected wealth at retirement after fees. 

FMA: Time to show what KiwiSaver members get for fees

KiwiSaver providers can expect pressure to show what value they're giving members, after an analysis prepared for the Financial Markets Authority showed they charge higher fees than comparable British funds.

The report, produced by actuaries MJW, was included with this year's KiwiSaver report.

It showed that New Zealand fees were higher than those of the UK across all fund types except the most conservative active funds.

KiwiSaver members were paying FUM-weighted average fees for active funds of 1.14% compared to 0.4% in Britain.

Passive funds sat at 0.67% and 0.29%, respectively.

Year-on-year the average fee charged to members increased 13%, to $132.26.

The FMA said, despite its expectation that there would be competitive pressure on fees, they had moved very little over the year to the end of March.

"We will be asking KiwiSaver providers to demonstrate how they are providing value for money for their members, which includes explaining their investment style and how higher fees are justified for services such as active fund management or responsible investment funds."

Director of regulation Liam Mason said, had the MJW report come back showing that New Zealand fees were cheaper than Britain's, the FMA might have decided to reduce the pressure with which it focused on fees.

"It hasn't said that."

He said providers' claims that fees had to be looked at in conjunction with services offered was valid.

The report has already prompted change – Westpac announced it would cut its monthly administration fee from $2.25 to $1 and reduce the management fee on its cash, default, conservative, moderate, balanced and growth funds by 0.1 percentage points.

Kiwi Wealth cut its fees the day after the period the FMA included in its report.

Richard Klipin, chief executive of the Financial Services Council, said there was a clear message in the report about fees.

"Fees are a work in progress but there is already considerable work going on across the industry to reduce fees and to deliver a greater range of fee structures and other product innovations to Kiwis.

“With the growth of the KiwiSaver market there is now real competition for consumers to choose from to ensure that they are getting value for money and that they are paying fees which reflect their needs."

The report showed that there was $1.04 billion in withdrawals by people aged over 65 in the year, and 23,000 of those people left the scheme,

He said that was a key area in which advisers could help.

Making their KiwiSaver savings last through retirement was a complex proposition.

That end of the KiwiSaver journey could be the most important for financial advisers to offer guidance in, he said.

Mason said it was positive that six out of the nine KiwiSaver default providers reported an increase in the percentage of members who had made an active choice on their investments.

“This has been a key focus for us over the past few years so it is great to see more than 52,000 default members made an active decision about their investment over the past year – up significantly from just over 28,000 in the prior year.”