KiwiSaver

Having an above-average allocation to global shares pushed ANZ’s OneAnswer Growth Fund to the top of the Melville Jessup Weaver KiwiSaver performance charts.

The quarterly survey reports on the performance and risk characteristics of the majority of New Zealand’s investment funds.

It found the OneAnswer Growth KiwiSaver fund returned 19.9% in the 12 months ended December, compared to an average of 17.8% for growth funds.

MJW principal Mark Weaver said the performance of the OneAnswer Growth Fund’s performance was boosted by the fund’s high allocation to growth assets, nearly 83%, and the strong performance from the underlying global shares.

“It was a good year for sharemarket investors with global markets up 27% and the NZX50 up 17.9%,” he said.

Global bond markets were up just 2.2% and the local government bond index was in negative territory because of the New Zealand economy’s strong outlook.

Of the balanced funds, the OneAnswer offering also topped the sector, with a return of 16.3% against an average 12.5%.

The fund had nearly 68% in growth assets, a reasonably high level for a balanced fund.

The best performing conservative fund was Mercer’s. It was up 7.4% and had a 38% allocation to cash.

Weaver said over the last one-, three- and five-year periods KiwiSaver funds have performed in line with their risk profiles.

Average annual returns over the five years to December 31 for growth, balanced and conservative options were 10.6%, 9.1% and 6.2% respectively.

“With the major market dislocation of the global financial crisis now five years behind us, it seems asset class returns are starting to conform again with long-term historical trends,” he said.

Buoyant stock markets helped KiwiSaver growth funds achieve another solid year in 2013, according to new figures by research house Morningstar.

But despite the continued strong performance of growth funds, the bulk of KiwiSaver money remains in more conservative options.

Aggressive funds were the top performers in the year ended December 31 with a total return of 15.9%, followed by growth funds which achieved a return of 14.6%.

Balanced funds were next, with returns of 11.3%, well ahead of moderate funds (7.3%) and conservative funds (including default funds), which returned 5.8%.

Default funds, which have $5 billion of investor money tied up in them, returned 5.5% for the year.

While the short-term results are encouraging for growth investors, the figures show they are also better off than more conservative KiwiSaver investors over the longer term as well.

Growth funds have returned 9.1% per year over the past three years, ahead of balanced funds (8.0%) moderate (6.8%) and conservative (5.9%). 

Over the past five years growth funds have average 10% per year, bettered only by aggressive funds (10.8%) and ahead of balanced (8.7%), moderate (7.5%) and conservative (6.3%).

The Mercer Conservative fund was the top default fund in 2013, returning 7.4%, almost 70% better than the worst-performing default fund, the Tower Cash Enhanced fund, which achieved 4.4%.

Morningstar’s figures show KiwiSaver continues to grow at a rapid pace, increasing in total funds under management by almost $4 billion (29%) during the year to reach $17.6 billion at year’s end.

However, more than a third of that money ($6 billion) is in conservative funds, dwarfing the amount in growth and balanced funds ($3.3 billion each), moderate funds ($2.6 billion) and aggressive funds ($1.1 billion).

The KiwiSaver market is still being dominated by a handful of large providers, with more than a quarter of total funds managed by one company (ANZ).

ASB, the next biggest provider with $3.6 billion under management, has the largest product with more than $1.8 billion invested in its ASB Scheme Conservative (a default fund).

The other providers with more than $1 billion under management are AMP ($2.8 billion), Westpac ($2.3 billion) and Fisher Funds, which has swelled to $1.96 billion after acquiring default provider Tower Investments. 

Mercer, the sixth-biggest provider, is likely to cross the $1 billion mark this year after reaching $974 million at year’s end.

Advisers may have to wait longer than expected for a boom in demand from KiwiSavers looking for financial advice, new figures suggest.

Inland Revenue’s sixth annual review of KiwiSaver shows that while investors are becoming more active in their choice of fund, most are still making the minimum required contribution.

The report, for the 12 months to June 30 this year, shows that 67% of the 2.15 million KiwiSaver members have chosen their own scheme, up from 65% last year and only 49% back in 2008.  In 2013 there were 136,167 transfers, an increase of 24% on last year.

However, the report also shows that 58% of members are only contributing the minimum amount of 3% of their salary or wages and their employer 3%.  This is roughly the same as last year (59%) before the minimum employee and employer contribution rate was raised from 2%.

KiwiSaver has often been cited as a future catalyst for growth in the financial adviser market, but Financial Services Council chief executive Peter Neilson says the IRD figures show it will still be a few years before this happens.

“There will be an increased market for advice but if you look at the average numbers they are about $8-10,000 per person.  People with $10,000 are unlikely to be major customers of advice but they may be in ten years’ time.

“Over time it’s going in the right direction but the vast bulk of people have got very modest balances.”

And the large number of people contributing the minimum will cause balances to grow more slowly, Neilson says.

“The problem is you’ve got a large number of people in KiwiSaver contributing at relatively small rates.  You’ve also got a skew towards young people.  People in their 20s are probably not going to want advice until they are in their 30s and 40s.”

Neilson says the FSC is pleased to see more KiwiSaver members picking their own funds, but many don’t know they are in conservative funds.

FSC modelling shows that if someone on the average wage contributing 6% stays in a conservative fund for the next 40 years they’ll end up with a nest egg at least $150,000 smaller than if they invested in a balanced portfolio and $250,000 less than being in a growth fund. 

Conservative funds suffer the highest effective tax rate which increases the savings required to get to a comfortable retirement, the FSC says.

A lack of independent advice for people entering KiwiSaver is a problem but will come right over time, says the chief executive of the Financial Services Council.

In its recently released annual review the FSC has reiterated its call for a more favourable tax treatment of savings investments.

It said one of its priorities was to make savers aware of how the tax system worked and the effect it had on their KiwiSaver balances.

The FSC has presented a package of options that it says would allow the Government to lower the tax on KiwiSaver so it is level with property investments.

This could be done by eliminating the hundreds of millions of dollars Government pays in tax incentives to KiwiSavers and redirecting the money.

The FSC says compound interest returns are severely hampered over a saver’s lifetime by tax.

Chief executive Peter Neilson said: “Lower taxes on savings in KiwiSaver funds would have a benefit for the economy too, dampening the attractiveness of investments in rental properties and the overheated property market and instead turning the light on to lifting productivity, wages, export competitiveness with a lower dollar and building a more robust national savings pool to fund greater investment in New Zealand enterprises and infrastructure. It may also serve to keep younger New Zealanders as contributing taxpayers at home rather than going to Australia where they could expect to receive double New Zealand’s average retirement income.”

People were missing out on advice when they signed up to KiwiSaver, he said.  “In an ideal world, people thinking about joining KiwiSaver would get advice from a financial adviser upfront… at the moment most advisers tend to avoid dealing with KiwiSaver because there isn’t fee income that’s commensurate with the time spent giving advice.”

He said that meant too many people did not realise that they were not in the right kind of fund for their circumstances.

The FSC estimates that if someone on the average wage, contributing 6%, stays in a conservative fund for the next 40 years, they will end up with a nest egg at least $150,000 smaller than if they invested in a balanced portfolio, and $250,000 less than being in a growth fund.

Neilson said as balances grew, advisers would be more inclined to advise on KiwiSaver. “Most people’s balances are still too small to be attractive customers for advisers but as they grow that will change and it will cure itself over time.”

He said KiwiSaver was a low risk investment but people would still benefit hugely from having someone offer general advice before they signed up, to ensure they were with the right fund and provider.

Neilson said financial advisers could also offer great value to clients who were thinking about transferring their superannuation fees across the Tasman by pointing out the discrepancies.

Under new Trans-Tasman portability rules, savings can be moved in either direction.  But Neilson said advisers need to make sure that their clients adequately understood the tax implications of moving savings to New Zealand.

Australian superannuation is taxed at 15c in the dollar, while most New Zealanders pay 28c on their KiwiSaver accounts. “People need to get advice on whether it’s sensible to bring savings across the Tasman.”