A decade of KiwiSaver lessons learnt
A decade of KiwiSaver has delivered many lessons to investors.
But have they learnt them?
Most KiwiSavers’ experiences over the past
10 full years of fund returns have been positive, but that’s a result of the past six years of stellar sharemarket returns.
The first year of KiwiSaver was a nightmare in the markets thanks to the global financial crisis, and the worldwide recession that followed.
David Scobie from Mercer, who crunched the numbers on the first full decade of KiwiSaver returns, jokes that if the returns of the first and tenth year of KiwiSaver had been switched ‘‘there would have been rioting in the street’’.
Instead of the median KiwiSaver growth fund (the very middle performer of all the growth funds) delivering an after-tax return of
10.1 per cent in the 12 months to the end of September 2017, it would have posted a 14.2 per cent loss.
That assumes a 28 per cent ‘‘prescribed investor’’ tax rate.
‘‘If we had that kind of return over the last year, people’s balances would be a heck of a lot lower,’’ Scobie says.
Imagine starting the year with $10,000 invested, and ending it with a little less than
$8600.
As luck (or ‘‘sequencing risk’’) would have it, the global financial crisis struck when KiwiSaver was in its infancy, and account balances were tiny, says Scobie.
So nobody really noticed.
A decade later, with over $40 billion invested, memories of the first year have faded, and a ‘‘remarkably durable bull market’’ has resulted in what Scobie calls ‘‘relatively subdued volatility’’. As a result, KiwiSaver has recently felt like a remarkably safe and steady way to make money.
Scobie says KiwiSaver is a ‘‘long term game’’, and those who have done worst out of KiwiSaver are those who have not contributed, and missed out on government member tax credits as well as sharemarket returns.
Those who have taken a long-term view and invested in higher-risk, higher-return growth funds have done best.
Most KiwiSaver funds had passed their
10-year anniversaries by the end of September, so the 12-month periods to the end of September each year are the periods Scobie analysed. 12 months to end September 2008 The global financial crisis led to a global recession. Sharemarkets fell. The median KiwiSaver growth fund lost 15 per cent of its value, though balances were so low nobody really noticed.
KiwiSaver funds can fall in value, sometimes by a lot.
2008
2013
2009
2014
2010
2011
2012
Lesson:
Fund performance for the year:
Default: -0.3%, Conservative: -2.8%, Balanced: -7.7%, Growth: -14.2% 12 months to end September 2013 The bombing of the Boston Marathon and US secrets leaker Edward Snowden dominated news. KiwiSavers experienced the second in a run of six great years of enrichment, unless they had put their contributions on hold.
More than 100,000 KiwiSavers had been on a contribution holiday, most for over a year. You have to be in to win.
Default: 4.5%, Conservative: 5.1%, Balanced: 9.5%, Growth: 14.1%
Lesson:
Funds:
Barack Obama is elected in the US. John Key wins power in New Zealand. Interest rates were cut the world over.
When interest rates fall, bond prices rise. Bond-heavy default and conservative funds outperformed growth funds, which ended the year in negative territory again.
Default: 3.8%, Conservative: 3.3%, Balanced: 1.1%, Growth: -1.3%
Lesson:
Funds:
12 months to end September 2014 Prince William brought the Duchess of Cambridge to meet us. Dirty Politics was published. The Scots voted to stay in the UK, and Flight 370 vanished. People start talking about sharemarkets being overheated.
Timing markets is extremely hard. Default: 6.0%, Conservative: 6.3%, Balanced: 9.1%, Growth: 11.7%
Lesson: Funds:
Deepwater Horizon gushed oil into the Gulf of Mexico, and the Greek debt crisis struck. KiwiSaver returns were modestly positive.
The Greek lesson was not to let your government bankrupt your country.
Default: 4.7%, Conservative: 5.0%, Balanced: 5.1%, Growth: 4.0%
Lesson:
Funds:
Rena hit the reef of Tauranga, sparking NZ’s falling out of love with oil. The Queen celebrated her diamond jubilee. Bumper year for KiwiSaver funds. Median growth fund delivers nearly 15 per cent after-tax returns.
Past performance is no guide to future performance. Panicked KiwiSavers who switched to lower-risk conservative funds missed out.
Default: 5.7%, Conservative: 6.6%, Balanced: 9.0%, Growth: 11.1%
Lesson:
Funds:
12 months to end September 2017 Donald Trump elected. Millions of women march in protest. Wannacry computer virus goes global. Bitcoin explodes. Everyone can smell the uranium on North Korea’s breath. Sixth straight year of super KiwiSaver returns. Low-cost KiwiSaver scheme Simplicity rattles the cage on fees. So does the Financial Markets Authority.
Fees matter. Returns after fees matter more.
Default: 3.4%, Conservative: 4.0%, Balanced: 6.5%, Growth: 10.1%
2017
Lesson:
Funds: