KiwiSaver

New Zealand’s boutique funds managers are set to benefit from the growth of KiwiSaver, even if they do not operate funds themselves.

Many big providers are outsourcing parts of their KiwiSaver products, such as stock selection, to smaller operators.

AMP announced this month that it was to outsource its New Zealand equity management to a third party. Big banks, such as ASB, also have aspects of their KiwiSaver investments managed externally.

Stephen Bennie, of Castle Point Funds, said it meant the country’s boutique managers were not shut out from the KiwiSaver flow of investment.

“They’re not in-house managing the money, that’s going to funds managers in some cases like ourselves. You saw the example of AMP recently – that’s the way a lot are going. That’s the favoured approach to getting the best decision made at a stock selection level.”

John Berry, of Pathfinder Asset Management, said: “That’s something I think will happen with time. The large managers may reach capacity with the assets they’re managing and others are outsourcing more and more functions.”

He called for KiwiSaver providers separate their platforms and funds management so investors could get access to a wider range of products.

But he said that might require a regulatory push.

“KiwiSaver investors want what is the best solution for any particular asset class. They want their KiwiSaver provider to say ‘I’m giving you the best solution in the market’. If the KiwiSaver manager has the platform and manages the product they’re likely to just choose their own.”

He said if providers were going to stand by their claim that their product was giving clients the best options in the market they should have to consider third-party options. “They don’t have to choose the third-party options if theirs it the best but they should test the market and make the call.”

The Financial Markets Conduct Act has introduced a licensing regime for funds managers, imposing a level of regulation not previously seen.

Berry said it would not drive smaller operators out. “If you look at where we’ve come from it was a situation where anyone could set up as a fund manager regardless of their qualifications and infrastructure. That was unacceptable from an investor perspective. We need minimum standards and to make sure that people offering products have robust systems.”

KiwiSaver investors are being told it’s better to focus on finding the right fund for their risk profile than to chase managers based on past performance.

Morningstar has released its latest KiwiSaver survey, for the December 2014 quarter.

It shows most asset classes registering positive returns.

The growth category of KiwiSaver funds was the strongest in the quarter, posting a return of 3.38%. Conservative funds were the weakest, with 2.41%.

Generate KiwiSaver and Kiwi Wealth KiwiSaver were the standout performers during the quarter.

Aon KiwiSaver Russell was the strongest performer in the income categories as its allocation to international bond markets helped boost returns.

Milford KiwiSaver Conservative was again a standout fund in the moderate category.

Morningstar said in its report it was more appropriate to evaluate the performance of a KiwiSaver scheme by studying its long-term returns than to look at it on a quarter-by-quarter basis.

“Aon KiwiSaver Russell is the most notable performer as it is at or near the top across all five categories. These funds have historically sat at the higher end of the growth/income split for each category range thereby benefiting from strong performance of equities.,” the report said.

ANZ KiwiSaver isthe strongest of  the default providers across the board, benefiting from more exposure to international markets than competitors.

But Morningstar warned that swapping to a new provider on the basis of past performance could be a poor decision.

The report said equity markets had risen to levels that likely could not be sustained as central banks moved towards tightening.
Instead, they said investors should focus on getting the right risk profile, which would pay off in the long run.

“We believe that it’s important for investors to first make sure that they are in the most appropriate risk profile. This decision, which corresponds with asset allocation, is likely to be the key determinant of future performance.”

KiwiSaver members in default schemes may have missed out on as much as $200 million in performance returns over the past 12 months because they are not in the right scheme.

Almost 50 per cent of the 2.3 million people in KiwiSaver are in low-risk, conservative or cash funds. Twenty per cent of members are in one of the nine default funds they are automatically enrolled into when they join the scheme.

ANZ general manager of wealth products and marketing Ana-Marie Lockyer said someone earning $55,000, contributing 3% of their salary, matched by 3% of their employer’s salary, would have increased their KiwiSaver balance from $10,000 at the beginning of 2012 to $25,619 at the end of November 2014, if they were in ANZ’s conservative fund. If they did the same thing in the bank’s growth fund, they would have $30,668, or $5000 more.

The employee’s own contributions made up 60% of their balance in the conservative fund, but only 50%in the growth fund.

“We believe that being in the right fund can make a big difference to reaching your retirement savings goals, given this difference over a short period of time recently.  Most of us will have our savings for 45-plus years so depending on long-term performance factors you can see it will make a big difference,” Lockyer said.

Lockyer called for a lifetime approach for default schemes where an investor’s risk profile was adjusted to fit their stage in life.

She said if default scheme members were put on a lifetime rather than conservative approach, they would have been a combined $200 million better off over the past 12 months.

“This is a significant number and a slice of this may belong to any default member who has not taken the time to confirm if the fund they were defaulted into is right for them.”

There are calls for advisers to be more proactive about encouraging KiwiSaver members to seek advice.

Many financial advisers have steered clear of KiwiSaver so far because commission rates are not high enough to compensate for the time involved in giving advice on still-small balances.

But balances are growing quickly. The cumulative value of maturing KiwiSavers is expected to hit $800 million in 2015.

Those earning more than $80,000 who reach 65 in 2028 are tipped to have $13 billion at their disposal.

Clayton Coplestone, of Heathcote Investment Partners, said advisers had told him KiwiSaver members with higher balances were already seeking and prepared to pay for financial guidance to ensure they received the best outcome from their savings.

“Anecdotally this tends to be with non-aligned advisers – as larger financial institutions tend to provide more homogenous solutions.”

Institute of Financial Advisers chief executive Fred Dodds said people with higher incomes and those contributing at higher rates would have significant balances and would want expert advice. 

People were starting to make inquiries about KiwiSaver advice, he said, but there was still work to be done in the marketplace. “I think a lot of people are in KiwiSaver and thinking they’re okay. They haven’t done the sums around what they’ll have when they get to 65.”

They needed to be guided in thinking about how much capital they would need, whether it would be left intact or run down, and whether they want to leave an inheritance. “To get a clear picture in their minds they should talk to an adviser.”

Advisers should be willing to take KiwiSaver members on even if it did not seem economic at first, he said.

A client with $25,000 in KiwiSaver would be unlikely to pay for advice and would only net an adviser about $75 a year in commission. But Dodds said dealing with them offered the opportunity of promoting personalised financial advice.

Advisers would often find people needed advice on other products at the same time, such as insurances, he said.

“Even if there’s not a lot of inquiry from the public, advisers should be out there saying ‘are you in KiwiSaver, have you been in there from the beginning? Then you should talk to me’. Get on the front foot, that would be my message.”