KiwiSaver

A legal opinion by law firms Chapman Tripp and MinterEllisonRuddWatts has outlined proposed changes to the KiwiSaver framework to support investment in private assets.

Commissioned by Toitū Tahua: The Centre for Sustainable Finance, the legal opinion says KiwiSaver members are missing out on investment options with potentially higher financial returns and long-term positive environmental, social and economic outcomes.

While most KiwiSaver members have 20 year plus investment horizons, there is little opportunity to take advantage of that longevity as less than 2% of the $100 billion in KiwiSaver funds is invested in unlisted shares. This is far less than retirement saving schemes in other jurisdictions, including the18% of Australian superfunds invested in private assets, the opinion says.

Co-author, MinterEllisonRuddWatts senior partner, Lloyd Kavanagh says at a time when New Zealand needs large amounts of capital to build sustainable infrastructure, it’s unfortunate some KiwiSaver regulatory settings unintentionally discourage some providers from investing in private assets.

“As a result, New Zealand trails well behind other countries, such as Australia, both in the proportion of retirement savings invested in private assets, and the returns earned by those retirement savings.

“Modifying the legal and regulatory environment to reduce those disincentives would serve a dual purpose of delivering better long-term value to KiwiSaver members and providing local capital to build much-needed infrastructure – especially to meet the risks and opportunities presented by climate change.”

Another co-author, Chapman Tripp partner, Tim Williams says the current KiwiSaver framework’s transfer and withdrawal settings deter private asset investment options by requiring all investors’ funds be available at any time to meet transfer and permitted withdrawals.

“Customers aren’t able to choose to commit their funds be held without transfer or early withdrawal options to access long term investments for greater diversification, to seek better potential returns or to meet their alternative investment preferences.”

He says private asset investment won’t suit every investor or be something all KiwiSaver providers will offer, but current KiwiSaver options lack the choices present in the broader NZ financial markets and internationally. This narrows the risk and return diversification choice in the KiwiSaver scheme universe, including the opportunity to provide needed capital for New Zealand’s development.

“It is worthwhile exploring why this is, and whether improvements can be made.”

Opt-out recommendation

While there is no explicit legal barrier to this activity and a number of KiwiSaver investment managers such as Simplicity, Booster and Pathfinder already invest in private assets, the opinion identifies three points that discourage providers:

• The need for sufficient liquidity to meet account portability obligations and member withdrawal entitlements;
• The requirement for daily pricing of assets; and lack of clarity around the requirement for fees not to be “unreasonable.”

The opinion outlines proposed legislative and regulatory amendments including tackling “liquidity bias” by allowing investors to opt out of account portability and early withdrawal entitlements, allowing for the creation of “private asset” funds with long term investment horizons, establishing a more efficient means of accommodating and adopting long-term asset valuation methodologies into KiwiSaver scheme trust deeds, and greater FMA recognition that higher fees are legitimately associated with private assets including clarification of the requirement that those fees not be “unreasonable.”

The legal opinion builds on Toitū Tahua’s Investing in Private Assets Recommendations paper released last year, which called for policy certainty (among other recommendations) for KiwiSaver providers and improving their capacity and capability for investing in private assets.

That paper came out of a technical working group composed of CSF partners ANZ, ASB, BNZ, Pathfinder, Harbour Asset Management, Milford Asset Management, Te Rūnanga o Ngāi Tahu, NZ Growth Capital Partners,Tauhara North No.2 Trust and Foundation North.

Key barriers and challenges identified by the group were policy certainty and regulatory clarity; KiwiSaver managers’ capacity and capability; organisational and market challenges posed by private assets; and KiwiSaver members’ expectation and financial literacy.

Toitū Tahua chair Bridget Coates, says both the government and KiwiSaver providers can do more to ensure KiwiSaver members benefit from a greater range of options to bring about better long-term value and contribute to the depth of NZ capital markets.

Commerce and Consumer Affairs Minister Andrew Bayly, who has received a copy of the opinion, has announced a review of KiwiSaver this year.

Market movements saw KiwiSaver assets grow $8 billion in the last quarter of 2023, ending the year at $104 billion according to Morningstar’s latest data.

Average multisector category returns for the December quarter ranged from 4.9% for the conservative category to 7% for the aggressive category. Default options averaged 6.3%.

All KiwiSaver providers, with the exception of two, produced positive returns over the December quarter, with most north of 5%.

Of the default funds, Simplicity, which made a small fee cut (0.29 to 0.25%) this month, had the best return of the quarter at 6.8%; for the 12 month quarterly result it shared first place with KiwiWealth, both returning 13.7%.

Morningstar analyst Greg Bunkall says Quay Street continued to perform well across many time periods in the conservative and balanced categories.

Milford had consistently high performance within the moderate, balanced, and growth categories over the long term, though it struggled in 2023 coming in at 17th, 22nd and 11th place across the three categories.

At the outer margins, the highest performer for the quarter (47.9%) and for the 12 months (149.3%) was Kōura’s Carbon Neutral Cryptocurrency fund, although at $2.7m in assets its impact on the market is negligible.

The lowest quarterly return of -7.2% was from Kernel’s S+P Kensho Electric Vehicle Innovation fund ($0.3m), and proving that it was not a good year for clean energy stocks, Kernel’s S&P Global Clean Energy fund ($0.7m) had the lowest 12 month quarterly performance at -14.9%.

Over 10 years, the aggressive category average has given investors an annualised return of 8.3%, followed by growth (7.9%), balanced (6.4%), moderate (4.6%), and conservative (4.3%).

Marketshare

KiwiSaver assets in the Morningstar database increased during the December quarter from $96b. Providers took an estimated $818 million of annual fees, with an average of 0.79%. This was up from $761m in the September quarter, when the average was also 0.79%.

Bunkall says consumers now have a wide range to choose from when it comes to fees.

ANZ led the market share (19.5%) with more than $20.3b, followed by Fisher (15.4%) with $16b. They were followed in order by ASB, Westpac’s fund manager BT and Milford.

The five largest KiwiSaver providers account for approximately 68% of assets in Morningstar’s database and generated around 69% of the fees. This led the other 24 providers surveyed scrapping it out for 32% of the market, with Bunkall saying some KiwiSaver providers are sub-scale right now.

Quarter on quarter there was some minor jostling further down the ranks with ethical fund manager Pathfinder climbing from 19th to 17th place, Forsyth Barr dropping one from 18th to 19th, and InvestNow taking a backward step from 17th to 18th place. FANZ dropped one place, PIE funds climbed one place and the rest remained steady.

Sustainability

Last September Morningstar added its Global Sustainability Rating to the survey; in the growth category 20 funds received four or five globe ratings for relative environmental, social, and governance risks within their portfolios. This was up from 18 funds for the September quarter.

“Every single KiwiSaver fund these days has a sustainability policy. They have exclusions avoiding certain stocks and they have engagement policies – it's almost become table stakes in KiwiSaver and especially in the default category with some of the larger providers.”

Generate becomes one of the largest boutique KiwiSaver managers.

Generate has cracked the $5 billion in funds under management (FUM) mark, making it one of the largest boutique KiwiSaver providers (outside of banks).

That growth has been driven by strong long-term performance, award-winning customer service and its focus on educating and empowering Kiwis to make smart KiwiSaver decisions, chief executive Henry Tongue says. 

“Our purpose is to grow Kiwis wealth. We do that through strong long-term performance and educating and empowering Kiwis to make smart decisions with their KiwiSaver, like getting into growth funds for the long-term and contributing more than the minimum 3%," Tongue says.

As active investors, Generate have been able to take advantage of market movements, which has helped it develop a track record of strong the results.

The most recent Morningstar KiwiSaver Survey showed each of the original Generate KiwiSaver Scheme funds placed in the top two in their respective categories for 10-year performance to 30 September 2023;

• The Generate Focused Growth KiwiSaver fund ranked 1st out of 8 funds in the Multi-sector Aggressive category
• The Generate Growth KiwiSaver fund ranked 2nd out of 14 funds in the Multi-sector Growth category
• The Generate Moderate KiwiSaver fund ranked 1st out of 12 funds in the Multi-sector Moderate category

Generate is also committed to achieving investor returns through responsible investment. This means it specifically excludes a number of harmful industries from its potential investments and looks for opportunities to invest in initiatives that make a difference for local communities, such as social housing developments in partnership with community groups. 

Fisher Funds chalked up very sluggish growth in its KiwiSaver funds under management (FUM) through the first quarter of owning Kiwi Wealth but the wholesale side of its business is growing at double-digit rates.

The latest MJW survey showed Fisher's wholesale FUM grew 14.6% to $18.36 billion between the September and December quarters of 2023.

MJW's Ben Trollip says his company's data covers all the wholesale funds its clients invest in, so the total may not include all Fisher's wholesale funds, but it does include the vast bulk of its wholesale FUM.

Not all Fisher's wholesale vehicles showed growth in the quarter – its NZ fixed interest fund, for example eased from $2.75 billion on Sept 30 to $2.73 billion – but others grew at a fast clip, including the international select equities fund which near doubled to $3.2 billion.

Fisher's KiwiSaver FUM grew just 0.38% in the year ended March 2023 – the year-earlier comparison is the sum of Kiwi Wealth's funds and Fisher's.

Among the top 10 KiwiSaver managers, that was the most sluggish growth with the exception of AMP, whose KiwiSaver FUM shrank by 0.63% to $5.8 billion.

At $14.42 billion, Fisher was the third-largest KiwiSaver manager, behind ANZ with $18.71 billion and ASB with $14.47 billion.

Growth does tend to be slower the larger a manager gets – ANZ's growth in the year was 1.03% and ASB's was 3.33%, while fourth-largest player, Westpac grew FUM at a 2.9% pace.

Milford Asset Management was the fastest growing of the top 10, increasing FUM by 17.3% to $5.65 billion.

Milford's wholesale FUM, as measured by MJW, grew 5.1% in the December quarter to $8.67 billion.

Fisher's investment style has always been a “buy and hold” strategy while Kiwi Wealth, which was started by Gareth Morgan and later sold to the Kiwibank group, was run on the belief that because most of the assets most New Zealanders own are concentrated in NZ, the KiwiSaver strategy should be to invest offshore to provide diversification.

Which is somewhat ironic since most of Kiwi Wealth's clients probably were also Kiwibank customers and had chosen to go “local” in choosing their bank.

“Swings and roundabouts” on investment returns

The results shown in MJW's survey show very much a “swings and roundabouts” returns from Fisher's own funds and the Kiwi Wealth funds.

For example, the Fisher growth fund was the second-best performer in the December quarter out of 15 funds with a 7.3% return while the Kiwi Wealth fund was fifth best performer with a 7.1% return.

The Fisher fund was 11th out of 15 funds over three years with a 3.2% annual return but third out of 13 funds over 10 years with an 8.2% annual return while the Kiwi Wealth fund was second over three years with a 5.2% annual return and seventh over 10 years with an 8% annual return.

Fisher didn't answer the question directly about how its Kiwi Wealth customers were feeling about the change in strategy, but did say both the Fisher and Kiwi Wealth funds had been run together since March 2023.

“The performance of each fund has been right near the top of the pack, driven by strong outperformance in our active equities strategies,” Fisher said.

“Fisher Funds has been very pleased with the returns generated for Kiwi Wealth clients since taking over the ownership, both on an absolute and relative-to-competitor basis,” it said.

“Given both Fisher Funds and Kiwi Wealth funds are now all invested into the same assets by the same investment team, any recent differences in performance between the two brands can be attributed to modest differences in strategic asset allocation of the funds.”

Fisher noted that growth funds are long-term investments and do experience short-term volatility.

“We are focused on delivering long-term results for our clients and we believe our active investment philosophy and approach will continue to do this.”

Fisher bought Kiwi Wealth for $310 million in November last year.