KiwiSaver

Aurora Capital, which has allocated 3% to private corporate debt for its KiwiSaver conservative and growth funds, is also interested in investing in startup companies.

Sean Henaghan, chief investment officer with Christchurch-based Aurora, says a new mandate with Queenstown-based private credit manager Private Capital Group (PCG) is just the first cab off the rank when it comes to private asset allocation.

The $260 million Aurora KiwiSaver scheme could ultimately have a private asset weighting as high as 7-8% although corporate debt would make up no more than 4%.

Property-backed assets aren’t of interest, instead he’s targeting investment that grows New Zealand business.

“I want to look at venture capital especially in university research and climate innovation. I'm talking to Aussie funds but most have little NZ allocation. I want to support domestic New Zealand.”

Henaghan, a Kiwi who spends 75% of his time in Sydney, has spent 20 years in Australia and witnessed how beneficial illiquid assets have been there.

“The funds that have thrived in Australia are those with big illiquid exposures. Basically the industry funds are the megafunds.” An example is the hospitality industry pension scheme HostPlus with a 50% allocation for unlisted assets.

Henaghan was previously with AMP Capital Australia and ran the Future Directions Options which looked to compete with the industry funds.

“We were daily unit priced so if ever more than 20% of our fund became illiquid, i.e. took longer than 30 days to liquidate, we'd get suspended. We made sure that never happened but we used to run 14% illiquid assets.”

Hence he has a mindset that is different to the NZ conventional wisdom on how much liquidity to hold in case members move funds.

“It's a risk factor you manage like any other in respect to your portfolio. You need to make sure you don't take too much but schemes are growing, there’s positive cash flow, and people can't touch their money for 25 to 30 years. Yes, they can move between providers, but that's a low number.”

Growing demand

There has been a growing appetite for debt amongst global funds driven by regulated changes to capital requirements for banks.

The 2019 RBNZ capital review required the four largest banks to gradually increase capital requirements to 18% of risk weighted assets, (16% for smaller banks), over seven years from 2022 onwards. This has affected the sub-investment grade end of the market  (everything below triple B).

However NZ corporate lending, which is mostly to small and medium enterprises (SMEs) has been too small to attract global corporate debt funds which typically want $100-200m transactions instead of $5-25m.

In 2019 PGC entered the market to fill the gap, setting up its corporate wholesale PIE fund in 2022 in response to the Reserve Bank review.

The total business lending market – excluding property and agriculture – is estimated by the RBNZ to be worth about NZ$124 billion. PGC co-founder John Ferrara estimates the sub investment grade part of the market is about $20b and growing at 3-5% per year.

It has a great macro tailwind, says Henaghan, which also did due diligence on Australian private credit providers but found none had enough NZ exposure. Meanwhile the NZ-based private debt funds Aurora looked at were property-backed only.

Henaghan met PCG co-founder Paul Caman in Sydney based on a recommendation by Vicki Hyde-Smith, head of fixed income at Macquarie Australia.

He was impressed by the PCG team’s knowledge and experience, 25-years for Carman and 20 years for Ferrara. Clients included MyFiduciary, Harbour, Forsyth Barr and JBWere, iwi, family offices and high net worth individuals.

PCG’s Diversified New Zealand Private Debt Fund PIE targets the OCR plus 4%, net fees, with 100% of assets structured on a floating rate. Now worth $30m, it is forecast to reach $50 million by the end of June and $100m by the end of the year.

PGC was able to comply with Aurora’s exclusions to maintain its KiwiSaver funds’ sustainability focus.

The fund being a PIE helped with liquidity, says Henaghan. But also, most of the loans are over 2-2.5 years and regularly recycled. “It's not like a private equity fund where you could be locked in for 12 years. This is why it's the perfect foray into unlisted space.”

Having a young client base also helped. Aurora KiwiSaver has a first home buyer fund which will have a very small allocation because it is still growing. But with most of the others, members won’t touch their funds for up to 40 years, says Henaghan.

A fixed asset with equity returns

Because most of the debt is sub-investment grade, Henaghan sees it as a return-seeking class as opposed to a defensive asset class and so Aurora’s 3% allocation has come out of equities.

“However, it's lower risk than equities,” he says. “People have this issue that because it's high yield debt, it's really risky. It is but it's further up the capital structure. There's also risk in equities and a growth fund will have 80% equities.”

Ferrara says NZ investors are used to a focus on equities and bonds. “Our asset class is different; we’re an income focused product. There’s no capital appreciation. We receive cash interest payments anywhere between every 30 to 90 days and the loans are prepaid ahead of the stated maturity.”

He says PGC lending is senior in the capital structure, ranking ahead of equity and other creditors.

Security interests are formally registered via legal contracts so, if a business sees a reduction in performance and an implied reduction in enterprise value, equity value is eroded before debt. Equity therefore represents a protective valuation moat around

PGC’s debt interest, which is a feature of all business loans, he says. “At loan inception that equity cushion can be up to 50%. This protects our principal and interest claims.”

KiwiSaver assets increased, owing significantly to market movements, to end the March quarter at $108.6 billion, up $4 billion from the end of last year.

The overall tone for the quarter was cautious optimism, while inflation was a concern, global growth prospects improved, and global equity markets delivered strong returns, particularly for unhedged holdings due to the weaker NZ dollar, says Morningstar director global fund data Greg Bunkall.

The five biggest providers, ANZ, Fisher, ASB, Milford and AMP accounted for 68% of assets and 69% of the $849m generated in fees. The average annual fee was around 0.78%.

Average asset allocation was 40.7% income and 59.3% growth, compared to 42.9% income and 57.1% growth for the previous quarter.

ANZ retained its usual position as the biggest provider with $20.4 billion in assets but at 18.8%, its market share declined from 19.5% the previous quarter. Fisher at second place with ($16.67b) stayed the same with 15.4% market share over the last two quarters. Nipping at Fisher’s heels, ASB was again third ($16.64b) but closed the gap, increasing its market share to 15.3% up from 15.1% at the end of 2023.

In fourth place Westpac ($10.7b) also slipped to 9.9% from 10.2% at the end of December, while Milford in fifth place ($8.5b) increased market share to 7.9% from 7.5% the previous quarter.

All multisector KiwiSaver funds produced positive returns for the period, with funds containing risk assets performing best. Returns for multi sector funds ranged from 2% for conservative funds to 8.8% for aggressive.

Of the default options, Booster ($563.6m) had the best returns for the quarter (5.5%) and the year (14%), while Westpac, the biggest default provider with $754.1 million, reported the lowest returns (4.4%) and (11.1%) for the same respective periods.

QuayStreet continued to perform well across many time periods in the conservative and balanced categories, Milford had consistently high performance with moderate, balanced and growth categories over the long term (five to 10 years), but has struggled to place in the top spots over shorter time spans. Generate had strong numbers across many time periods.

In the conservative category Fisher Funds topped returns for the quarter (2.6%), the one year (9.6%) and five year period (3.9%). Milford had the best returns for the 10 year period with 5.8%.

In the moderate category Generate topped the quarter (4.1%), the one year (11.2%) and the 10 year period (6%).

For balanced it was QuayStreet’s socially responsible fund which topped the quarter (7.5%) and the one year period (16.7%), while QuayStreet’s balanced fund had the highest returns for the three year period (7.6%). Milford’s balanced fund had the highest returns for the five year (8.1%) and 10 year (8.8%) period.

In the growth category, QuayStreet topped the quarter (9.3%) and the three year (9.6%) period. Generate growth fund was top for the one year period (20.3%), while Milfford active growth took top place for the five year (10.6%) and 10-year (10.4%).

In the aggressive category it was Generate focused growth fund at number one (11.4%) for the quarter and the year (25.4%), with Milford topping the five year period (8.6%) and Booster socially responsible high growth topping the 10-year returns (10.2%).

Over 10 years investors in the aggressive category have had average returns of 9.1%, followed by growth (8.4%), balanced (6.8%), moderate (4.8%), and conservative (4.3%).

Nikko has relaunched its GoalsGetter KiwiSaver proposition adding other managers’ funds and making improvements for advisers.

Nikko’s GoalsGetter KiwiSaver Scheme now has a diversified mix of 18 high-calibre funds.

It says these funds have been hand-picked by Nikko AM NZ’s experienced team from a range of leading fund managers and include funds from Milford, Harbour, Salt, Pathfinder and Generate alongside Nikko AM’s own funds.

Nikko AM New Zealand managing director, Stuart Williams, says that putting a structured, pre-vetted framework around fund choice plays a key role in enabling KiwiSaver members to realise the benefits of diversification.

“Diversification is one of the core fundamentals of successful investing. But achieving the right portfolio settings still requires thorough market knowledge and investment expertise.”

“While we’re not the first KiwiSaver scheme to offer a multi-fund solution, others rely on the individual to understand the options and make their own fund selections from a wide variety of possibilities. This can often lead to poor choices and/or an unbalanced portfolio.”

Williams says that the scheme has also been designed to assist financial advisers to provide robust, cost-effective, tailored solutions for their clients.

Goals Getter’s funds have been vetted by investment experts, including an independent investment consultant.

“Our inbuilt expert robo-advice functionality can further refine the selection and guide members to the most suitable funds based on their personal objectives and risk preferences,” Williams says.

“The GoalsGetter KiwiSaver Scheme not only provides financial advisers with the ability to deliver a personalised diversified portfolio solution across quality fund managers; our
market-leading technology supports a streamlined, fully-digital client experience from onboarding to tracking performance to transacting.”

“This evolution of our KiwiSaver scheme offering under the GoalsGetter brand is very much in line with the GoalsGetter philosophy of connecting individual investors, either directly or through their financial adviser, with expert strategies tailored to their savings ambition,” he says.

Kiwi-owned providers have come out on top of Consumer’s annual KiwiSaver satisfaction survey.

Simplicity has the most satisfied customers, while Australian-owned provider AMP the least, the survey has revealed.

Simplicity, Generate and Milford had the most satisfied customers.

Consumer CEO Jon Duffy, said each of these NZ-owned firms not only achieved Consumers people’s choice status again, but performed above average for investment returns also.

On the other end of the scale, the big four banks BNZ, ANZ, ASB and Westpac rank sixth, ninth, tenth and eleventh place, respectively.

The survey has found a big difference in satisfaction levels when it comes to the management of their KiwiSaver funds, said Duffy.

Ratings were given for eight key measures: overall customer satisfaction, access to account information, how well customers are kept updated about their investment, timeliness of response to inquiries, the fairness of how problems and complaints are dealt with, returns on investment, ethical investments, and fees and charges.

Almost 2000 New Zealanders, aged 18 years and older, were surveyed online in January and February 2024. The overall satisfaction score is the percentage of people who scored their KiwiSaver provider 8, 9 or 10 for satisfaction on a scale of 0 (very dissatisfied) to 10 (very satisfied).

AMP scored a 39% satisfaction rating. Its customers were the least satisfied with how AMP dealt with problems and complaints.

Westpac (BT Funds Management) performed poorly across every customer satisfaction measure. It took second-to-last place, scoring particularly poorly when it came to the way it kept customers updated about their investments.

In tenth place was ASB and ANZ took ninth place. Both performed below average when it came to overall satisfaction and poorly for the fairness of their fees and charges.

Simplicity was a people’s choice winner for the fifth year in a row and ranked first with an overall satisfaction score of 79%, thanks in part to its low fees and ethical investments.

Generate was joint top performer with Simplicity for ease of accessing account information and timely responses to enquiries. It won a people’s choice award for the third year in a row.

Milford Funds picked up people's choice for the seventh year in a row, due in part to its above average performance for its fees and keeping customers updated about their investments.