Low fees no guarantee of funds’ value: report
Cheaper is not necessarily better when it comes to KiwiSaver funds, a new survey suggests.
KiwiSaver fees have been in the spotlight over recent months as providers have been required to report their annual fees charged to scheme members in dollar terms.
But work by financial product comparison platform PocketWise shows that there is no evidence cheaper funds have produced the highest returns, after fees and tax, for New Zealanders.
The analysis, which was conducted on diversified funds, showed that the cheapest 15 per cent of funds barely featured in the highest-performing 15 per cent of funds across any five-year period in any of the categories.
There were only three instances where there was an overlap between the cheapest and the highest-performing funds.
The same analysis was conducted ending the June period each year, resulting in a pattern.
PocketWise spokesman Binu Paul said: ‘‘You are better off figuring out the category of funds that suits you, and then hunting down funds that are value for money in that category. If you ask just for ‘cheap’, you might end up getting exactly that.’’
Only funds with a five-year history were considered.
The Commission for Financial Capability’s KiwiSaver Fund Finder tool on the Sorted website showed fees on $10,000 invested in a balanced fund would range from $52 to $174 per year.
Aaron Gilbert, an associate professor of finance at AUT University, said the research had asked the wrong question.
‘‘The question should be: Does investing in an expensive fund, one of the top 15 per cent, guarantee that your returns will be in the top 15 per cent? Academically, from the vast literature on this topic internationally, the answer to that question is no.
‘‘Over time . . . funds with similar risk targets tend to earn similar returns and fund rankings tend to jump around.
‘‘A fund might be a cellar dweller one year and top next. By comparing only on fees and returns you aren’t actually comparing apples with apples.
He said risk had also not been accurately considered. People would earn higher returns if they took more risk but the issue was whether they earned enough extra to compensate for that risk.