KiwiSaver

Financial advisers are stepping in while the Government 'does nothing' to ensure KiwiSaver works for New Zealanders, one market commentator says.

The recent Morningstar KiwiSaver report showed some of the schemes that deal most commonly with financial advisers were lagging behind industry average returns.

In the year to December, default KiwiSaver funds returned an average 1.5%, conservative 1.3%,  and moderate funds 0.4%. Balanced funds were down an average 1.3%, growth down 2.1% on average and aggressive down 4.1% on average.

OneAnswer funds struggled to meet that return – the conservative fund was up only 0.5% in the year, conservative balanced down 0.7%, balanced down 1.9% growth fund down 4.4%.

AMP’s LS aggressive fund was down 4.2% for the year.  NZ Funds’ growth fund was down 8.3% and Booster’s geared growth fund was down 5.9%.

Chris Douglas, principal at MyFiduciary, said even if adviser-distributed funds were not topping the tables, their clients should end up better off.

“Look at the where the money is invested for the adviser-distributed options and there tends to be a great allocation in balanced- and growth-oriented KiwiSaver schemes, where a large portion of those who are not using an adviser are in the default options earning a very meagre return. As a result, the average investor who has used an adviser would have done materially better than the average investor who hasn't,” he said.

The risk profile of their KiwiSaver was one of the most important decisions an investor could make, he said.

“Advisers have tended to place their clients in the higher risk options which have performed materially better than those in conservative options, as they should over the long-term.

“I think that many advisers are playing an important role in KiwiSaver. As a result of the poorly structured default process, many investors are far too conservatively invested – especially those with 15-20 years till retirement. They are really missing out and should be invested into a balanced or growth scheme, which is where they will get the best potential returns from. So, you could also say that advisers appear to be doing a very important job by ensuring that clients are appropriately, given the government is doing nothing. “

About 60% of all KiwiSaver funds tracked by Morningstar ended 2018 in the red.

It has released its latest KiwiSaver survey, showing sharemarket volatility hurt fund managers.

Returns for the calendar year ranged from 3.60% down to a loss of 6.77%. The conservative category recorded an average return of 1.3% for the year, followed by moderate funds at 0.4%, balanced with an average  loss of 1.3%, growth an average loss of 2.1% and aggressive an average loss of 4.1%.

The top performers over the quarter included FANZ Lifestages KiwiSaver Income, Fisher Two KiwiSaver Scheme and Aon KiwiSaver Russell Lifepoints.

Milford KiwiSaver Active Growth Fund topped the performance across all multisector categories over 10 years.

This approach was originally launched as a domestic-equity capability but has become more diversified as it has grown with offshore exposure and investments across asset classes. Performance has stacked up favourably against peers, with returns comfortably ahead of the category average.

"Despite a difficult year for many other equity markets New Zealand shares delivered a positive return of 4.9% and was one of the best performing developed economy equity markets last year," the report said.

"Australian shares fell 8.2% over the quarter and 2.8% over the year. The Achilles heel of the Australian market was the large financial sector, which dropped by 14.8% in the wake of highly damaging findings by the Royal Commission. There were patches of positive performance: the defensive consumer staples stocks performed reasonably well as did IT shares, and the miners were also ahead for the year.

"But the dead weight of the struggling financials, plus losses for the industrials and consumer discretionary stocks were the dominant influence. For New Zealand investors, the losses in Australian dollar terms were compounded by the appreciation of the New Zealand dollar against the Australian dollar."

Financial markets over the last few years have enjoyed the equivalent of a “long hot summer” characterised by calm weather and warm sunny days. From experience, we all know that long hot summer days can occasionally encourage excess in the form of too much sun or fun. The same excess is also a risk for financial markets and the wider economy.

Locally the good times are obvious in the number of cranes on the skylines of our major cities and in the difficulty of finding staff. The United States is also seeing similar capacity constraints as labour market surveys show there are more job openings than there are unemployed.

There is a saying that financial bull markets do not die of old age. Instead, they end due to a combination of capacity shortages constraining growth and central banks increasing interest rates to counter the risk of rising inflation.

In the United States this process in now well under way as the Federal Reserve has raised interest rates eight times already and will probably do so again in December. Higher interest rates have tightened monetary conditions in the United States and globally. This squeezes those in a weaker position, primarily those with excessive debt loads and/or economically sensitive incomes. During the Global Financial Crisis this was predominately households in the United States and in New Zealand, non-bank lenders such as finance companies.

This time round, a key area of stress is likely to be the corporate bond market. A decade of ultra-low interest rates forced many investors out of cash as it did not generate a return into other investment assets. Much of this money flowed into the corporate bond market. Globally, companies were more than happy to accommodate this demand by issuing bonds at historically low interest rates. In the United States, this has seen the corporate bond market double in size over the past decade to more than $5 trillion.

Initially the bond issuance was used to replace higher cost debt with cheaper funding but as the cycle continued, companies have increasingly used this as an opportunity to borrow aggressively to fund the purchase of their own shares. Excessive buybacks can leave a company with more debt to repay and no new sources of revenue with which to repay it. Many of the bonds used to fund buybacks have been issued by companies at the lower end of the investment grade spectrum: BBB rated bonds rather than A rated bonds (BB, B and CCC rated bonds are not considered investment grade). BBB rated bonds now account for over 48% of the United States investment grade bond universe, up from 34% at their low 10 years ago.

The pattern in New Zealand is different as we have not seen companies increase their debt levels to the same degree. However, companies have increasingly issued bonds to replace bank debt, issue subordinated debt and remove investor friendly terms from their bond documents. This makes these bonds more exposed to any slowing in the economy. In a slowing economy the combination of declining earnings and rising debt costs will see interest coverage erode and make the BBB investment grade bond universe look shaky.

At this point the reaction for many investors will be to sell these bonds. This can be more challenging for bonds. Unlike shares, the secondary market for bonds is limited and this is especially true in New Zealand. It is easy to buy a bond when it is first issued, but more difficult to sell the same bond before it matures. We therefore anticipate the markets may struggle to absorb this selling without a significant re-pricing. In anticipation of this, we have substantially reduced clients' exposure to lower quality investment grade bonds and have invested in downside mitigation strategies that are designed to limit the impact of a downturn in investment grade bonds. 

* Source: International Monetary Fund. Barclays Capital. Tse Capital.

Booster has snapped up the former Mahana Estates winery site, and announced the formation of the Booster Wine Group.

The high-profile Nelson winery went into receivership as its owner became embroiled in a bitter legal fight with a Las Vegas businessman.

KiwiSaver provider Booster spotted the opportunity to add the site to its other wine investments: Awatere River, Waimea Estates, Bannock Brae and Sileni Estates.

The fund manager said the purchase, and formation of Booster Wine Group, would create a new investment opportunity for members.

“Most New Zealand wineries, as small independent businesses, have always been challenged by scale.  The Booster Wine Group allows our wineries to focus on what they do best – produce world-class wine, while still remaining Kiwi owned and operated,” said managing director Allan Yeo.

“The wine industry is one of New Zealand’s most successful exports.  We’re pleased to be keeping a piece of it in local ownership and giving everyday Kiwi investors the chance to share in its success.”

He said only a fraction of KiwiSaver money was being invested in New Zealand businesses at present.

Booster has several other investments in its pipeline which are expected to be finalised and announced this year.

“Booster Tahi helps invest Kiwi savings back into successful New Zealand businesses to help fulfil their growth potential and to keep them Kiwi owned.  While our initial focus has been on horticulture investments in wine, kiwifruit and avocados, we see exciting opportunities in other areas as Tahi grows,” Yeo said.