Call for transparency to ensure investor confidence

KiwiSaver providers should tell clients about exposures to Silicon Valley Bank and Signature Bank and put them in context to restore confidence.

Investment advisor Chris Douglas of My Fiduciary says KiwiSaver fund managers have an obligation to provide full and frank disclosure to investors and even prospective investors.

His comments come in the wake of multiple KiwiSaver schemes losing money through investment in the failed US mid-tier banks Silicon Valley Bank and Signature Bank.

“Too often people feel that funds are opaque. That’s changed a lot over the last few years with greater transparency from regulation and quarterly reporting, but with KiwiSaver in particular, there are incentives to join; it’s government sponsored, there’s the tax credit, and so there’s a higher level of obligation from fund managers to really make sure they engage with the public and with the media, on what they're doing and why.”

Last week Newsroom reported that the Fisher Funds KiwiSaver scheme had lost $80 million through Signature Bank investments. Signature Bank was in its select international portfolio and its NZX-listed investment company Marlin Global had advised a 3.3 per cent weighting to market. Fisher said across the portfolios with exposure to Signature Bank, holdings ranged from 0.2 to 0.6 per cent. In its blog Fisher advised clients it had written the value of its Signature Bank holdings down to zero.

This week the NZ Herald revealed that ANZ saw a loss in value of $31m from exposure to SVB across KiwiSaver and non-KiwiSaver with total funds under management of $30.5 billion. ASB Bank had exposure to both US banks as of February; SVB was worth less than $2 million and Signature Bank was less than $1m across total funds under management of more than $20b. The impact on client funds was estimated at less than 0.01 per cent. Westpac’s KiwiSaver manager BTNZ had small exposure to SVB with around $100,000 in shares and $2 million in bonds. It sold the bonds for around half their original value and estimated the impact at around 0.004 per cent for growth and 0.015 per cent for conservative funds. Milford said it had a small exposure which had minimal impact on funds, and would advise clients through the usual updates. It wouldn’t put a dollar value on its investments.

Although there is no legal obligation of KiwiSaver providers to tell members if they lost money on a single investment unless it was material in the context of the investment portfolio, Douglas says right now is the time to give investors confidence that they are in a well diversified portfolio, that the US regional banks are a very small part of the wider economy, and that the regulator has stepped in to give a tremendous amount of confidence to deposit holders in all banks.

“I understand why they don't necessarily need to always be putting out notes to investors. They have to balance between scaring people and worrying about what's going on within the markets and assuring them they should be focused on the long term.

How they think about engaging with clients is really important because the reality  is they have to strike a balance. With KiwiSaver people can easily switch out and move to another KiwiSaver provider.”

Milford embraces technological advice and transparency as part of third party Kiwisaver growth

In 2007, Milford Asset Management entered its retail phase, originally built on a network of direct clients.

It has steadily established a following among third-party advice businesses and recently have switched to multi-channel distribution.

Despite having a multi-channel distribution strategy prior to joining, Milford head of intermediary distribution Michael Robson says his role four years ago was focused on the intermediary channel- business direct to financial advisers, but switching to a multi-channel model has seen a significantly positive effect on Milford’s third-party distribution market – specifically Kiwisaver.

He says dealing directly with independent financial advisers had contributed to Milford’s then $200 million Kiwisaver scheme but opening the multi-channel distribution saw the scheme grow to $1.73 million which he attributes to continued engagement with advisers, resolving transparent advice fee and client rebate issues a few years earlier, and technology.

Robson says having the option of digital platforms has been beneficial and embraced by clients and advisers.“ It fits in with our multi-channel distribution that clients may want to access Milford through a range of different ways. We’re supportive of clients being able to access us in the way that suits them.”

Robsons says while Milford are not relying directly on the use of technological advice alone, they do have a direct offering but if clients have relationships with advisers who feel they need that ongoing advice, they can support that.

“Now that we’ve set up that distribution channel, they also have access to Milford funds, they can also choose to have an adviser support them on their investments, like their Kiwisaver journey.”

KiwiSaver managers making “excessive profits”

Simplicity cuts KiwiSaver fees and complains other managers are charging too much.

KiwiSaver manager Simplicity has made a 3.3% total fee cut across its conservative, balanced and growth KiwiSaver funds and diversified investment funds. The new total fund charge will be 0.30%, effective April 1. The fee cut is the fifth in five years.

Simplicity removed annual member fees for investors under the age of 18 in 2018, and the following year moved to a single member fee regardless of the number of funds held by an investor. In 2020 the membership fee was reduced by $10, and this fee was eliminated for all members in December 2021.

“As a non-profit, we continue to pass on the benefits of scale to our members,” Simplicity managing director Sam Stubbs said. “And we’re on track for more fee cuts in the future.”

Stubbs was very critical of the excessive profits being made by many KiwiSaver managers.

“The FMA annual KiwiSaver report showed fees in 2022 were $692 million. That’s almost $1.9 million every calendar day,” he said.

“Yet being a KiwiSaver manager requires no statutory capital, and involves huge economies of scale,” he said. “Fee cuts in our industry should be frequent, but they aren’t.”

The June Quarter 2022 Morningstar KiwiSaver survey shows the average asset based fee for conservative funds is 0.63%, Balanced funds 0.86% and Growth funds 1.03%.

Simplicity’s current fee for all its diversified funds is 0.31%, ie. 51%-69% lower than the industry average.

“The maths is tragic, because the numbers suggest that as much as 50% of KiwiSaver fees, which ordinary New Zealanders pay out of their savings, is either profits for the fund managers, or commissions for financial advisors,” Stubbs said.

“That suggests potentially $345 million in excess fees last year,” he said.

“KiwiSaver is a wonderful retirement scheme. But sadly, too many in the finance industry treat it like a trough of fees, with too few benefits of scale passing back to their members,” he said.

Call for simple KiwiSaver benchmarks to replace ‘Frankenstein constructs’

KiwiSaver benchmarks, while fulfilling a government mandate, don’t serve much purpose, a new study says.

While the first part of Russell Investment NZ’s research, released last year, focused on institutional benchmarking practices, the second considers KiwiSaver. It concludes that most benchmarks are composed of a hodgepodge of unrecognisable underlying fund benchmarks providing little relevant information to members.

For example a survey of the ten biggest providers found 40 different indices used to represent seven asset classes, and for one Balanced Fund, a bewildering 17 separate indices including six for one asset class – Australasian equities – were used.

Report author, Russell CEO Matthew Arnold thinks the practice should stop.

Under KiwiSaver, employees rather than employers have the responsibility of choosing a retirement product and strategy, so given low levels of financial literacy, KiwiSaver needs to be simple and transparent. It would also provide an easier means for financial advisors to judge the overall results of KiwiSavers, both stock selection and asset allocation, he says.

“KiwiSaver providers are required by law to assign an appropriate performance benchmark so members can compare their performance to the market. They should be widely recognised and reflect the nature and risk of the underlying assets so members can assess whether their returns are appropriate given the fees paid and risk taken. Added value and underperformance should be clear.”

So are KiwiSaver benchmarks delivering this objective? Arnold says no, with most being inaccessible and giving people no clue as to what they are, what’s in them, and how they are constructed or managed.

They are also investable – not representing any alternative to investors, change regularly, so are not consistent, and are highly customised, so hard to compare to each other.  “Their use as a comparison tool and KiwiSaver measuring stick is limited.”

Arnold thinks the industry should follow the lead of the National Super Fund which takes a reference portfolio approach.

“KiwiSaver would benefit from the introduction of Reference Portfolios – KiwiSaver Benchmarks – that are consistently applied to all funds of the same risk category – conservative, moderate, balanced, growth, and aggressive growth.” Arnold says a good portfolio benchmark should reflect the opportunity set, be transparent and measurable, and unambiguous in its construction and, hopefully, represent the basis of an investable alternative.

A better way forward

The  ideal would be straightforward, transparent and  representative of the opportunity set with 20% of the benchmarks made up of  local assets, and with a consistent ‘neutral’ hedging strategy – 100% for global fixed interest and 50% for global shares.

They would use  widely accepted global indices as component benchmarks such as MSCI All Country World Index (ACWI) Net Total Return for global shares; Bloomberg Global Aggregate Bond Index NZD-Hedged, Total Return for global bonds; S&P/NZX 50 Total Return with imputation credits for local shares; and, the Bloomberg NZBond Composite 0+ Yr Index Total Return for local bonds, be rebalanced annually, and be investable.

Some KiwiSaver providers such as Pathfinder are using Morningstar’s NZD Target Allocation indices which calculates a selection of diversified multi sector fund benchmarks for the New Zealand market but Arnold says while these indices share many of the positive characteristics of the KiwiSaver Benchmarks proposed in the report, there is still an undesirable level of complexity and lack of investability.

Benchmarking for active decisions

The impact of Responsible Investment decisions (and other active decisions) should also be clearly attributed and accounted for. That means tracking total portfolio or KiwiSaver fund results versus broad market benchmarks rather than heavily modified ESG indices.

“Then, members would be better able to assess whether their Responsible Investment decisions have added or detracted value enabling a greater understanding of whether the KiwiSaver fund was meeting their needs.

“To be clear, we are not making an assessment of the Responsible Investment practices of local fund managers, or suggesting that investors avoid considering ESG factors (we have a detailed set of beliefs, policies and procedures ourselves). We are simply stating that investors should consider any moves away from the broad, investable universe as active decisions.”

Arnold thinks the KiwiSaver benchmarks could also be used by other comparable defined contribution schemes such as corporate, public and industry retirement plans to monitor their progress and performance. This would benefit all members in New Zealand retirement schemes by improving transparency, and making progress comparable.

What about the Default KiwiSaver schemes, which are mandated to exclude securities from certain sectors? “While some may argue there is cause to exclude the securities from the manager benchmarks given the restrictions imposed on them by the government, we believe the full impact of these decisions should be made clear through benchmarking, i.e. core broad benchmarks should be used.

“An equitable, low cost strategy for default schemes would be for all providers to manage their schemes passively against the relevant benchmark, all for the same fee. That would be fairer than the current situation where chance plays too great a role in deciding the relative outcome for members simply due to a random allocation process.”