KiwiSaver

Morningstar analysts have given their stamp of approval to a reduction in ANZ KiwiSaver fees.

The rating house has given the bank’s KiwiSaver funds a silver rating.

Analyst Elliot Lucas said the depth and tenure of the ANZ investment team was unmatched among KiwiSaver providers, although investment analyst Alan Clarke and senior capital markets manager Stuart Millar would benefit from more analyst support.

“ANZ takes a long-term view in the strategic positioning of its portfolios, which is the key driver of performance, although the team looks to add value through short-term tactical positioning, currency hedging, and stock selection. While they won’t be perfect, the team has proved that they can get these calls right more often than not. For instance, overweightings in domestic and international equities from 2012 to 2015 propelled returns as ANZ featured among the top performers.”

Lucas said an above-average fee had tempered Morningstar’s view of ANZ as a KiwiSaver option in the past but the reduction had brought it into line with its peers. “All told, this is amongst the best KiwiSaver schemes on offer to investors.”

ANZ’s head of product – funds and private bank, Grant Hodder, welcomed the rating. He said ANZ had reduced its total expense ratio for the ANZ KiwiSaver conservative fund by 20% since 2009.

“These savings are largely arising from greater economies of scale as the fund balances grow.   It’s also good to see that Morningstar has noted that these benefits are flowing to members.”

Private companies are being suggested as a good place for KiwiSaver providers and other fund managers to find growth opportunities.

John Johnston, of Milford Asset Management, said a disproportionate share of New Zealand’s economic output was concentrated in the hands of privately-owned enterprises rather than being accessible to investors via the listed market.

He said there were 243 businesses with a turnover greater than $200m and 2490 companies with turnover of between $20m and $200m. The average return on assets of the 2490 companies in 2015 was 5%, double the average of 2.5% return for businesses of over $200m in size.

“We believe these attributes taken together make the private company market in New Zealand an attractive place to look for compelling growth investment opportunities.  In fact, Milford has had a successful track record in this market with 12 Milford Active Growth Fund private company investments over the past five years.”

Brooke Bone, who manages the private investments for the Active Growth Fund, said the private investments had performed very well and were well ahead of the overall fund performance, which sits at 13.7% over the past year.

Some investments, such as that in Manuka Health NZ or Kauri Property Fund, had been sold. Others, such as Orion Healthcare and AFT Pharmaceuticals, had ended up listing.

Bone said the high public profile of Milford meant that there was a large amount of information about private investment opportunities being submitted regularly.

He said the Milford team would then look at the options and select those that were the most likely to become listed companies. “We’ve been doing this for five years and started small but continue to add more businesses and new investments in this area.  We are keen to get to the point where we can assist these businesses to become listed businesses, but we see some being sold as well. We’re not just collecting a big group of private companies.”

He said most diversified portfolios would aim to have between 3% and 8% in alternative assets, including private equity. The Active Growth Fund has just under 3% at present but has been as high as 7%.

”It’s helped to enhance the returns of the active growth fund and decreased the volatility of the return and enables us to have greater capacity going forward. We consider it to be a very good way to develop the New Zealand economy, by finding these good growth companies and adding capital to then enable them to grow faster.”

He said there were additional risks and there was less liquidity if shares needed to be sold, but the benefits outweighed the negative.

Norman Stacey, of Diversified, said KiwiSaver investing in private companies was one of the “great national benefits” of the scheme, which would lead to deepening markets and an increased capital pool.

“NZ Super Fund has to a very significant extent led the way. As with listed shares, private equity is best diversified – so best with a variety of selections to spread the issuer risk. I am peripherally involved in a private equity candidate in NZ, with a view to taking a more dominant role. Our objective will be the KiwiSaver capital pool.”

Massey University commentator Claire Matthews said it was a legitimate option for funds.

“But I think it would be important for funds to make it clear if they are doing so in order that their members understand what their funds are being invested in.  There are different risks associated with private equity, and I would generally expect only growth and/or more aggressive funds that are inherently structured for higher levels of risk to be doing much in this regard.”

Some fund managers have said private companies are not a feasible option for KiwiSaver because of issues around size, efficiencies and problems valuing the asset.

Research house Morningstar has given faint praise to the KiwiSaver schemes operated by Grosvenor, now rebranded as Booster.

The balanced fund, balanced growth, conservative fund, high-growth fund and default saver fund have all been given a neutral rating in the latest update. They were previously rated negative.

Morningstar hands out gold, silver, bronze, neutral and negative ratings based on analyst research.

Analyst Elliot Lucas said Booster was an “acceptable option” in the KiwiSaver space.

“Firm founder Allen Yeo and CIO David Beattie launched this KiwiSaver strategy in 2007 with a very conservative approach, focused relentlessly on downside protection. This approach paid off very well in the 2008 financial crisis but subsequently proved a drag. After years of underperformance and after the firm’s acquisition of Fidelity Life KiwiSaver substantially expanded the number of advisers using the scheme, Booster implemented a big process change in late 2013. It moved the strategy’s asset allocation in line with the relevant peer group average and imposed tight risk budgets,” he said.

He said the new strategy was a major change in approach. Instead of focusing on absolute risk, the Booster team were looking at risk relative to peers.

“Booster still implements some tactical tilts when it believes the relative prices of asset classes have deviated significantly from long-run averages. The team plans to increase the risk budget allocated to these tilts over time. Exposures at the asset class level are still mostly passive, though Booster does pick securities for Australasian equities, domestic fixed income, and part of the global equities allocation.”

Lucas said the changes should mean less drastic under-performance but would also lose some of the extremely defensive nature of the previous strategy.

He raised a note of caution about the team managing the fund, calling it “of reasonable size in theory but under-resourced in practice”.

“Neither Beattie nor Yeo are fully focused on the portfolios and some of the analysts responsible for security selection – albeit within tight risk controls – are rather inexperienced.”

He said fees were also above average. Booster has been approached for comment.

Meanwhile his colleague Matthew Wilkinson gave Mercer’s KiwiSaver schemes a better result, awarding them a bronze rating.

“The portfolios boast the widest investment opportunity set in the market, and diversification across managers is high. For instance, no other KiwiSaver providers we cover invest into unlisted infrastructure or natural resources. The unlisted exposure was tempered in 2014 to bolster liquidity but still forms a significant part of the portfolios.”

He said that level of diversification meant relative performance was strong when traditional assets were performing poorly but lagged when markets were strong.

Work is under way to require superannuation savings scheme providers to report on their annual fees in dollar terms – but some providers say that might be harder than some expect.

The Financial Markets Authority, Commission for Financial Capability and Ministry of Business, Innovation and Employment are working on a project that could lead to some fund managers being required to change the way they disclose fees.

MBIE financial markets manager James Hartley said the Commerce Minister had commissioned work on annual statement reporting of KiwiSaver, superannuation and workplace savings schemes earlier in the year.

“The annual statement work focuses on making KiwiSaver statements easier to read and gives us an opportunity to consider ways we can ensure banks and fund managers make clear and easy to interpret disclosure information available to consumers.”

The work is being led by MBIE. It proposes that annual statements should include a projected retirement balance and income figures, and the total fees the investor has paid in dollars.

At the moment, most report on fees as a percentage.

MBIE is finalising a document for consultation about implementing the changes.

But there are concerns that it could be hard to implement, particularly for big providers with a range of diversified and outsourced products.

Grant Hodder, head of product, funds and private bank, at ANZ, said he was supportive of transparency. But the transition might not be straightforward.

“Providers will need to build an engine to calculate the fees in dollar terms for members and then feed that into the annual statement information so this will take some time,” he said.

“Any calculations will also need to account for members who have sums of money spread across different funds within a KiwiSaver scheme.  And before anyone can start we need to agree on details – for example whether to calculate on an average balance for the year or end-of-year balance.    It is all achievable but there is a bit in it so will take some time to build.”

One fund manager who did not want to be named said each provider would have to calculate the fees at a client level, across thousands of people.  “Doing it at an individual client level would add a lot of cost that the client might end up paying for possibly for little additional benefit.”

George Carter, of Nikko, agreed there was more to think about. “Often for retail investors the fund management fee is just one aspect of the total fee.  For this to be effective, it would be necessary to get a total fee picture which would require inclusion of platform fees, advice fees as well.  Otherwise, if the focus is on just one area things have a habit of migrating to other less well-disclosed areas.”