KiwiSaver

Flows of KiwiSaver money into New Zealand equities are putting pressure on the market and could make it hard for managers to cash out if they want to, it has been claimed.

Sam Faulkner, of Russell Investments, has written a report looking at the rapid growth of KiwiSaver assets and their effect on the New Zealand equity market.

KiwiSaver assets have grown from $1.2 billion in 2008 to $35.6b this year and it is expected to continue to grow rapidly.

Faulkner said the value of New Zealand listed equities within KiwiSaver had mirrored the growth of total KiwiSaver assets but the market capitalization of the NZX50 had not.

He said Russell estimated there was that there was about $10b of institutional actively managed capacity in the New Zealand market, and AUM was at $9b.

“We estimate that the average New Zealand equity manager believes it can successfully manage around 1.7% of the total market. Some already manage well in excess of this proportion,” he said.

“There could be some pinch point in terms of capacity over the next two, three or four years.”

If New Zealand were to follow Australia’s lead, the trend would only increase and the issues would get bigger, he said.

That capitalization squeeze could be countered with more listings on the NZX, providers dialing back their allocation to New Zealand equities, or more passive investment.  “Our experience has been that these things aren’t happening,” Faulkner said.

Russell managing director Alister van der Maas said the home bias was prevalent around the world. but in other countries there was not so much of a capacity and liquidity issue because of the size of the market.,

“The challenge is when there’s a market event of some form that causes asset allocation changes en masse, if they no longer want growth assets and want income, what can you do about that if you are at capacity and there is no liquidity in the market?”

He said that was one of the risks fund managers would have to consider but it was not accurately reflected in the new risk indicators, which provide a rating based on historic performance.

Faulkner said a small-cap manager would have to invest contributions into less-frequently-traded stocks and with a low level of liquidity this could move the price of the stock.

Most New Zealanders are clueless about KiwiSaver fees and not much better informed about their funds’ performance, a new survey has shown.

The survey was released by the Commission for Financial Capability and the Financial Markets Authority.

It found fewer than half of the respondents knew even roughly what they were paying in fees and two-thirds said they would expect to continue to pay the same if their account balances increased.

When prompted to think about it, just over half agreed that fees and returns were equally important in reaching their retirement goals.

The FMA’s director of external communications and investor capability Paul Gregory said: “It’s good to see people recognise that, now we want them to do something about it. The reason for doing this survey was to prompt them to think about two of the most important factors in their KiwiSaver scheme – the fund they are in and how it performs, and the fees they are paying for those returns.”

CFFC group manager of investor education David Boyle said: “Most of us are pretty careful about other kinds of fees – you wouldn’t take on a real estate agent without finding out what it was going to cost you. Nor would you pay someone $60 to mow your lawns if you could get it done for $40 – unless they trimmed your hedges too. So why pay KiwiSaver fees without knowing how much they are and what you are receiving over and above the cost of managing your money?”

Only half of respondents knew how their fund had performed this year, and only a third knew how it had done over the past five years.

Most expected solid returns over the next 12 months – more than half of those in a conservative fund expected up to 4% return and 8% of those in a growth fund expected more than 10%.

Almost 90% said they knew how much was in their KiwiSaver account, to the nearest $5000.

Adviser-distributed Generate KiwiSaver grew its funds under management by just over a quarter in the three months to the end of June, a new survey shows.

Aon has released its KiwiSaver survey for the June quarter, which shows overall FUM increased by 4%, to $32.9 billion.

But Generate was a standout performer, with a 28.4% increase in FUM over the period. That takes it to 0.7% of the total KiwiSaver market – still the second-smallest provider.

Milford and BNZ followed with 7.8% increases.

Banks still dominate the KiwiSaver market – the big five manage 67.5 % of the assets under management in KiwiSaver and have grown their FUM by $925 million over the last quarter and $2 billion this year. ANZ is by far the biggest provider, with 26.1% of funds under management, or just under $9 billion. It is followed by ASB, with 18.9% or just over $6 billion.

The Milford Active Growth Fund was the standout performing over the year, returning more than 9%. Aon’s survey shows returns after fees and tax.

But conservative funds did the best in the quarter – Fisher Funds and Milford’s conservative options returned 1.8%.

Since the inception of KiwiSaver, Fisher Funds’ growth fund has been the star performing, delivering 8.2 per cent per year.

The Aon survey shows that across the board, managers are now slightly overweight to cash but underweight on international and New Zealand equities.

Generate was not available to comment.

New Zealand’s newest KiwiSaver provider is calling on the rest of the industry to adopt standard responsible investing protocols.

KiwiSaver investments have been in the spotlight over recent days after a political outcry over revelations that some default funds are invested in companies making bombs and land mines. 

Sam Stubbs, of new KiwiSaver provider Simplicity, said it would make sense for the whole industry to follow the NZ Super Fund’s policy on responsible investment.

The fund has an extensive responsible investing programme, including exclusions for companies involved in the manufacture of cluster munitions, manufacture or testing of nuclear explosives, anit-personnel mines, tobacco or whale meat.

Stubbs said it was an elegant solution that was already set up and ready to be applied to KiwiSaver, too. “We have a Kiwi solution that is world class,” he said.

Simplicity is to use Vanguard funds for its KiwiSaver investments.

That would breach the NZSF rules in its current form – Grosvenor has had to move to drop its investment in the Vanguard Index Fund because of its exposure to cluster bomb manufacturers.

But Stubbs said it should be straightforward to get other KiwiSaver providers to agree to follow the principles, and they could then go to Vanguard to ask for it to apply the exclusions to investment vehicles used by KiwiSaver providers. Only a small number of shares would need to be excluded, he said.

“I hope they all fall into line,” he said. “I can’t see why you wouldn’t. It’s a very easy way to approach it that would solve the problem in a robust way.”

A University of Auckland researcher, Matheson Russell, has been calling for some time for all default schemes to be invested responsibly.

He said there should be a legislative mandate for all schemes to work to a framework in the same way that the Super Fund did. “There is a history of neglect in this topic and the chickens are coming home to roost as people realise what they are invested in.”

He said it was naive to suggest that investors should pay attention to where their money was going. “We need to be realistic about how much effort people put into it.”

The managed funds industry had changed with the advent of KiwISaver, he said, and was now a much more mainstream product and the expectations on providers should reflect that.

IFA chief executive Fred Dodds said it was not the responsibility of advisers to drill down to the underlying investments of funds. Instead, they would try to get an overall view of what a client would be comfortable with.

“I don’t think it is necessary for advisers to drill down to the specific issues of armaments, alcohol, tobacco, pornography, nuclear Power – that would be a challenging exercise. On the basis that an adviser’s role is to determine the requirements of a client then I would imagine many advisers would have this issue come up in initial discussions around financial goals and educating clients on how to achieve them This would include overviews of different investment types and the issues of responsible and ethical investments.”