Ethical investment returns the goods

For the first time, responsible investment KiwiSaver provider Pathfinder is included in the three year return numbers for Morningstar’s KiwiSaver Report – topping the numbers for Conservative, Balanced and Growth funds.

Pathfinder, a boutique fund manager with a focus on sustainable and impact investment, entered the rankings in 2019 when it was founded by John Berry and Paul Brownsey. In Morningstar’s data for the September quarter, Pathfinder’s three year returns came in at Conservative 2.8% v -1.9% average, Balanced 5.2% v 1.4% average, and Growth 7.9% v 2.3% average.

CEO Berry puts its performance down to a number of factors; a change in adviser attitudes towards RI, a greater number of ethical investment products on offer, and growing client awareness. A generational shift in investor behaviour also plays a part, says Berry, as wealth transitions down driving more demand. He notes however there are many older people who think about what they’re leaving for the next generation when choosing investments.

“We’re finding that advisers want to incorporate RI within their business these days and front footing rather than waiting for clients to ask them about it. The world is changing fast and climate change is prevalent. Everyone from superfunds to small boutiques are thinking about how their investments have an impact. And of course it’s also a reflection of performance.”

Chief investment officer Brownsey says apart from the feel good factor, RI fund managers still bear the burden of proof. “The vast majority of people still want to see evidence that it’s working and they’re starting to realise there’s no cost to being an ethical investor. You could argue there has been a benefit over the past three years. In the end it comes down to three things: am I avoiding things I don't want, investing in things I want, and getting good returns?”

What makes Pathfinder’s success more notable is that it is an impact fund manager, actively seeking investments with the intention of generating a measurable beneficial social or environmental impact alongside financial returns.

“There are different shades and approaches to implementing responsible investment,” says Berry. “At a very light level you might exclude controversial industries which is the most common way to do it, for example excluding fossil fields. The positive approach would be to not only exclude fossil fuels, but over weight towards renewable energy. Then you can go a step further with impact investing where you find private companies which are harder to access, which are doing good things. An example for us is a New Zealand company, Wool Aid that has made a biodegradable band aid from merino wool. That’s a lot less plastic going into landfill.”

KiwiSaver mirrors difficult market in Q3

Challenging underlying market conditions experienced over the September quarter were evident in returns listed in the Morningstar KiwiSaver Survey Q3.

Average multisector category returns ranged from –1.3% for the Conversative category to –1.8% for the Growth Category. KiwiSaver assets ended the quarter at NZ$83.5 billion. Top performers over the quarter against their peer group includes: Milford Conservative 0.5% (Multisector Conservative), InvestNow Mind Divresif Inc

1.3% (Multisector Moderate), InvestNow Milford Balanced 1.2% (Multisector Balanced), QuayStreet Growth 1.6% (Multisector Growth), and Milford Aggressive 0.4% (Multisector Aggressive).

Taking the longer view, in the past ten years the Aggressive category average has given investors an annualised return of 8.5%, followed by Growth (8.0%), Balanced (6.4%), Moderate (4.3%), and Conservative (3.9%).

Morningstar Director of Manager Selection and report author Tim Murphy said globally, as financial conditions tighten and policy-induced recession becomes more likely, the trade-off between growth and inflation has become increasingly clear.

ANZ led the market share with more than NZ$17.07 billion, with ASB in second with a market share of 16%. Westpac was third ahead of Fisher Funds, with Kiwi Wealth fifth. The six largest KiwiSaver providers accounted for approximately 69% of assets on the database.

The MSCI World Index was up 3.12% in the September quarter, helped by the depreciation of the NZD.

KiwiSaver 2022: higher fees, lower investment returns

New Zealand’s 3.168 million KiwiSaver members paid $692 million in fees in 2022, a 6.9% increase from the previous year. These fees – a combination of administration and management charges –  chewed up more than half of members’ investment returns, which this year dropped 90% to $1.3b.

Income from administration fees fell from $80.8m last year to $50.3m in 2022 but income from management fees jumped 12.8% to $642.3m.

These are among a raft of figures released this morning by the Financial Markets Authority (FMA) in its annual KiwiSaver report, covering the period from 1 July 2021 to 30 June 2022.

The FMA says the rise in fees reflects a 10% hike in funds under management, from $81.2b to $89.7b. Almost half of the rise in FUM was in growth funds, totalling $38.5b and up 17.7% year-on-year. Investment in conservative funds dropped by 14.4% over the year to $18.2b, largely because default fund members were moved to balanced funds which rose 20.8% to $26.4b.

The FMA says the shift in the amounts invested in different fund types is consistent with a longer-term trend where the numbers of investors in conservative funds (excluding previous default members) has shrunk 3.6% from 2017 to 2022 while growth fund membership has ballooned 54.8% in the same period, now accounting for nearly half of overall membership.

Contrary to what members might expect, the FMA says its KiwiSaver Tracker data reveals negative average returns for conservative funds for the year while growth funds reported positive average returns. “This is likely to be influenced by most conservative funds weighting towards bonds which suffered significant price declines.”

Of the 3.168m KiwiSaver members, only 1.9m are contributing. But the FMA says the $11.3m in contributions from these investors is largely behind the growth in FUM and includes a significant 20.3% increase in lump sum contributions, totaling $2.2b. Just over $5b in contributions came from wages and salaries last year.

Fifteen years after KiwiSaver was introduced, the average balance stands at $28,324. However, actuaries have pointed out that a few very high balances skew these figures, meaning the average balance doesn’t necessarily reflect the state of most KiwiSaver accounts which are likely to have considerably lower balances.

Membership withdrawals were up 24% to $3.8b over the year, with the over-65s showing a 59% rise to $1.95b. For the first time, retiree withdrawals exceeded those by first-home buyers, who collectively pulled out $1.44b. This spike was a “big surprise,” the FMA said, and was almost double the amount withdrawn the previous year. The number of retirees closing their KiwiSaver accounts was up 10% to 21,466 but the number of over-65s who remain in the scheme is up 14%.

With lower unemployment, significant hardship withdrawals were down 33.4% to $106m while withdrawals by those with life-shortening congenital conditions rose 49.9%. This is the first full year that people with Downs syndrome, cerebral palsy, Huntington’s disease and foetal alcohol spectrum disorder could automatically apply.

“The data in this year’s KiwiSaver annual report shows the strength of KiwiSaver as a long-term savings vehicle, with resilience to volatility a necessary feature of its design,” says Paul Gregory, the FMA’s director of investment management. “While we celebrate World Investor Week, the report reinforces our messages about taking a long-term view of investing.”

Gregory says New Zealanders have become increasingly aware of the role KiwiSaver can play in their financial well-being and preparedness for retirement, particularly when home ownership becomes less certain.

“This is the context for our work in KiwiSaver, including focusing on the value members receive for the fees they pay and the risk they take. This conversation about value is holistic in its approach, considering KiwiSaver providers’ investment returns, the help provided to members for good investment decisions and other value-adding features and services.”

As part of its value-for-money fees initiative, the FMA released a report in April this year which said the “repeatable competence” shown by fund managers is being eroded by high fees. Fund managers are not using appropriate indexes to benchmark their performance and managers often pay commissions to third parties to grow membership numbers, meaning all members incur outgoing fees and costs without this being clearly disclosed, the FMA said.

It will be cracking down in all three areas in the coming year via a self-assessment questionnaire for fund managers and “other regulatory tools” if persistent conduct issues are found.

However, the FMA says it has been encouraged by the drop in average fees paid by default members and only a small increase for active members. On average, default members paid $64 (down 11%) while active members paid $245 (up 2.1%).

Petition starts for KiwiSaver sharing

The KiwiSaver company Kōura Wealth has started a petition to improve gender equity in retirement.

The petition will urge parliament to change the KiwiSaver Act so that a couple’s contributions can be pooled. 

This would create a Contribution Sharing Scheme, under which couples, either married or de facto, could share their KiwiSaver contributions.

This would ensure that people taking time off work to raise children would not be disadvantaged compared with their partners who keep on working.  

Such a change would reward both partners equally for their joint interest in raising a family.

At present, the law means that women who usually take time out for child rearing end up with less money in their KiwiSaver accounts when they retire.

Te Ara Ahunga Ora Retirement Commission has estimated the difference to be 20%.

The founder and managing director of kōura, Rupert Carlyon, has seen the gender gap many times in his career and says it creates a “sense of insecurity and lack of freedom that many forecast for their retirement.

“The team at kōura believe one size does not fit all and that couples should be given the option to make financial decisions that benefit them and their family.”

Carlyon said it would be a voluntary scheme with both parties needing to opt in. The value of the contributions would be split annually for as long as the couple wanted the scheme to last for.

The kōura petition is an alternative to earlier suggestions that the state could pay so-called care credits which would maintain KiwiSaver payments for a person taking time off work for a baby.

But the government has shown no interest in agreeing to this.  

Some companies make these payments available to highly valued staff, but lower paid people generally miss out. 

A splitting regime as proposed by kōura would be easier to manage and could be universal.