KiwiSaver

New Zealand’s falling dollar made the biggest difference to KiwiSaver members’ account balances over the most recent quarter, research firm Morningstar says.

It has released its latest KiwiSaver survey, to June 30. Over that period, the New Zealand dollar fell in value by just over 8% against the US, 12% against the Euro, 9% against the Australian, and 13% against the British pound.

KiwiSaver funds with more exposure to growth assets performed more strongly than conservative funds again in the quarter.

Morningstar said that did not necessarily mean the growth assets themselves performed better but that currency exposures within conservative funds are usually fully hedged so were not affected by the falling New Zealand dollar. The median aggressive fund returned 2.85% for the quarter, while the median conservative fund returned 0.38%.

Forsyth Barr and Generate were the top performing aggressive and growth funds. Generate was also top of the moderate category and Kiwi Wealth topped the conservative category.

Tim Murphy, director of manager research, said the drop in the dollar had come as a bit of a surprise, given how strong the dollar has been lately. “The benefits of that have been seen in funds that have unhedged foreign exposure.”

But he said that did not mean KiwiSaver members should rush to change to funds that were exposed to the falling currency. “You shouldn’t make a decision on your KiwiSaver investment on the basis of one particular factor. You’ve got to ascertain what’s the appropriate risk profile, then compare the different options and providers. There is no one magic solution.”

In the past, Morningstar has been critical of the fees charged by conservative funds and Murphy said they had not changed.

He said KiwiSaver members could see a drop in funds as assets under management grew and managers had more scale to work with. He said how much the managers would try to hang on to increasing margin and how much they might pass to members would remain to be seen.

Meanwhile, Morningstar analysts say pockets of value are returning to the New Zealand sharemarket.

Asia-Pacific consumer sector head Daniel Mueller said stocks were trading in line with fair value estimates after a market pull back in the most recent quarter.

He said Contact and Genesis Energy were both trading below fair value. Ryman Healthcare and Fisher and Paykel Healthcare were two high-quality stocks with strong growth prospects trading close to fair value. Mueller said low-risk New Zealand property stocks were a reasonable place for investors to be.

“I wouldn’t say there is lots of value but it looks now that they are fairly valued.”

The search for yield has pushed up some defensive stocks to levels that some analysts have described as overpriced but Mueller said they had started to come off a bit. “Over the last quarter they have pulled back a bit and there is a little bit of value.”

Spark had come off the boil after a number of non-core asset divestments and a subdued reaction to the half-year result.

A number of simple steps could dramatically improve the financial wellbeing of KiwiSaver members if there was industry collaboration to implement them,  investor education workshops have been told.

At IRD’s annual KiwiSaver day this year it is holding a workshop to discuss possible administrative tweaks to the KiwiSaver system.

As part of the Commission for Financial Capability’s summit this month, workshops involving KiwiSaver providers, IRD, the Ministry for Business Innovation and Employment and financial advisers discussed the value of investor education and what more could be done to improve outcomes for New Zealand savers.

That feedback will be collated and delivered to the IRD workshop on August 10.

A number of top priority initiatives were determined.

They included ensuring savers were in the right choice of fund, making it clear what benefit extra contributions could have and the cost of a contribution holiday, showing on annual statements the income a lump sum would translate to, and understanding key concepts such as compound interest and risk and reward.

The workshops said there were still a number of gaps in investor education resources. Participants said many members still did not understand KiwiSaver is not Government guaranteed, many did not understand the different investment types and there needed to be work to get savers making better use of resources.

Those who participated in the workshops are now being asked to share the outcomes with their colleagues and staff and pick the top three initiatives that they think would make the most material change to KiwiSaver members.

Commission group manager of investor education David Boyle said the aim was to realistically determine what could be done.

He said much of what had been suggested was the type of change that needed to be adopted industry-wide and could not be implemented by one individual group working alone.

“If we are serious about changing New Zealanders’ financial wellbeing, the biggest component of that is KiwiSaver, if we can find two or three things other than the member tax credit to do at a certain time or in a certain way and all do it the same way it cuts through the noise of life. It’s tough enough getting people to top up their account to get the [full member tax credit], let alone working out whether they are in the right fund or what income they need in retirement. But that doesn’t mean we shouldn’t try to do it.”

There are still benefits to signing children up for KiwiSaver, despite the removal of the $1000 kickstart, says ANZ’s general manager of wealth products and marketing Ana-Marie Lockyer.

ANZ is reporting 50% fewer new KiwiSaver sign-ups since the incentive was removed.

Lockyer said part of that reduction would be fewer people aged under 18 signing up.

Without the kickstart, parents who sign up their kids will need to regularly contribute money to cover the cost of administration fees on the account. Previously, many had signed up for the $1000 and left it alone in the account to grow over time.

Lockyer said it had been made clear that the target audience for KiwiSaver was working New Zealanders.

But there were still reasons that parents might choose to sign up their children before they started at a job.

“You might want to start saving for their first home and give them a certain amount of money that will allow them to purchase a home. It’s also a way to start conversations about savings with your kids.”

Regular statements on a KiwiSaver account were one tool parents could use to engage with their kids about money and boost their financial literacy.

She said the drop in new sign-ups was not surprising and had been consistent, week on week, since the announcement.

“You always expect once an announcement is made that there is a period of uncertainty.”

Lockyer said it was possible it could bounce back.

But she said the biggest problem as a result of the change was that people might lose confidence in the scheme.

ANZ research showed that KiwiSaver members’ biggest concern was the possibility of the scheme being tampered with. “They don’t want to see changes that are not well advised.”

ANZ’s survey showed 62% of people who have not joined KiwiSaver are less likely to because the kickstart is gone, 40% are less confident about the future of KiwiSaver and 52% are worried that the Government will make other changes.

Conservative KiwiSaver funds are being tipped to barely outperform cash over the next seven years.

The New Zealand Institute of Economic Research (NZIER) has warned that KiwiSaver members in conservative funds are in for poor returns, in its first New Zealand Investment Quarterly.

Conservative funds, including the nine KiwiSaver default funds, mostly invest in sovereign (government) bonds and cash while allocating only a small proportion to shares.

They are expected to return only 4.6% per year to 2022, compared to the expected average 90-day bank bill rate of 4.2%.

“NZIER believes sovereign bonds will perform poorly in the medium term, which would drag down the returns from conservative funds,” said NZIER principal economist Aaron Drew.

Balanced funds, which invest less in government bonds and cash and more in shares, are expected to return 5.6% per year while growth funds, which mostly invest in shares, are expected to achieve an average return of 6.5%.

The returns are gross of fees and taxes.

“Conservative funds have performed very well in the low-rate environment we have seen since the GCF hit, but they are likely to significantly underperform growth funds in the long term,” Drew said. “There is a cyclical aspect to our forecast: we believe bonds, particularly sovereign bonds, are vulnerable to a correction when interest rates globally start to rise.”

Drew said funds would benefit from greater exposure to share markets and some alternative asset classes, which are expected to fare better than bonds in the medium term.

“Equities are looking like a mixed bag, with Europe, Japan and the UK offering better value than the US, Australia, Canada and New Zealand markets.”

Drew is hoping the NZIQ will re-ignite discussion about asset allocation in KiwiSaver.

Conservative and moderate funds account for almost 44% of the $27 billion measured in the latest Morningstar KiwiSaver Survey.

“Over 40 years, the difference between a growth fund and a default fund could add up to tens or even hundreds of thousands of dollars for a KiwiSaver investor,” Drew said. “There has been a lot of public discussion about KiwiSaver contribution rates and what is required to achieve a comfortable retirement, but members will not get the most out of the scheme if they are in the wrong type of fund for their risk profile and investment horizon.”