Kiwisaver default funds ‘go to extremes’
‘‘EXTREME’’ ASSET allocations in the supposedly generic KiwiSaver default funds are behind wide divergences in performance.
From the outside, the six enormous default funds, which contained a combined $4.4 billion of Kiwis’ retirement savings at the end of December, look similar, but the spread of returns investors have got is anything but.
All were set up by government order to be low-risk funds for people joining KiwiSaver who were unable or unwilling to choose a particular fund.
The default funds, which are limited to having only 15 per cent to 25 per cent of funds invested in risky growth assets such as shares, were designed to preserve capital and not to lose money. That design has worked; despite the ravages of the global financial crisis, none has lost money.
However, Morningstar performance data shows that instead of a few basis points of difference in performance, there are several hundred, something that would ordinarily be expected from funds investing in a riskier mix of assets.
Over the year to the end of December, the highest-returning default fund (Onepath) returned 8.1 per cent. The lowest (AMP) returned 6.1 per cent.
The five-year annualised return shows that pattern has held across the full five years the funds have been in existence. The highest return (Onepath again) is 5.8 per cent. The lowest (AMP again) is 4 per cent.
Asset allocations have played a big part in that result.
The differences are to a large part the result of what one fund manager dubbed the ‘‘extreme’’ asset allocation positions of several of the default funds, allocations another manager described as defying ‘‘logical explanation’’.
‘‘On the surface most – if not all – do not make sense,’’ said that second manager, who asked not to be named.
Arguably the most extreme position taken by any of the funds is that of AMP, which at the end of December had almost 70 per cent of its giant fund in cash, a weighting that would usually imply the manager expected significant losses in the other asset classes available to it to invest in.
The average cash position of the other five giant default funds – including the fund offered by AXA which AMP has now taken over – is just under 30 per cent.
It turns out there is a philosophical schism in default fund management, and AMP has opted to run the fund as a temporary home for money, something other fund managers have moved away from.
Tower’s Sam Stubbs explains: ‘‘Everybody thought the default funds would be short-term parking lots.’’
High levels of cash provided liquidity, and savers would quickly switch to higher growth funds. That has not proved to be the case and, Stubbs said, managers have stopped running them as short-term vehicles, but as vehicles for making money.
Around three years ago Tower lowered its cash holdings – something that had made it one of the poorer performers. Picking interest rates to fall and stay low, it put money into local and overseas bonds.
That has seen it rise up the performance rankings, though its bond position is now at the extreme end of the default-fund spectrum.
Fiona Oliver, general manager for wealth management at AMP Financial Services, confirmed Stubbs’ analysis.
‘‘AMP has adopted a different approach with its AMP KiwiSaver Default fund to most other providers as it is a specific purpose default fund. Other providers typically use their diversified conservative fund as their default fund.’’
Instead of managing the fund as a longer-term home for money, it worked to have investors choose a more appropriate fund to shift their savings into.
‘‘AMP is focused on helping to educate KiwiSaver members about the other types of funds that are available that may better suit their investment needs based on their individual risk profile,’’ Oliver said. ‘‘Therefore, the AMP KiwiSaver default fund is weighted to cash to ensure high levels of liquidity and reduce performance volatility.’’
The result of that philosophy is a vast fund with an asset allocation position that does not match AMP’s expectations of markets.
‘‘AMP’s outlook is not to expect a sharp increase in bond yields despite signs of an improving global economic environment,’’ Oliver said. ‘‘That said, we currently have a dynamic asset allocation across our diversified funds generally that is underweight to bonds and overweight to equities given our positive view on equities.’’ Things could change however. ‘‘In the second half of 2012 we completed a full asset allocation review of our AXA KiwiSaver Scheme and a review of our AMP KiwiSaver funds is currently underway,’’ Oliver said.
It’s not hard to imagine hard, commercial reality playing a part in that review. AMP’s low default fund returns have damaged its ability to retain investors, and it is also fighting an uphill battle against the big banks which have successfully poached KiwiSavers from nonbank rivals.
All of the default funds are still winning investors thanks to the flow of new default KiwiSavers, but AMP’s default fund flow – money in minus money out – has been the lowest of all the funds.
In the year to the end of March last year, Morningstar estimated its fund flow as $31.9m compared to $57.2m for Tower, $78.6m for AXA, $80.4m for Onepath, $103.3m for Mercer and $284m for ASB, though ASB and ANZ’s Onepath have the advantage of the marketing power of a bank to win new customers.
It wouldn’t be the only change at AMP, which can only use the AXA brand for a few more weeks. On February 18, the AXA KiwiSaver scheme will be rebranded the AMP Wealth scheme. Ultimately the market expects the two schemes to be merged – something that would allow funds with poorer track records to be discreetly merged away – but that is not expected until after the end of the first default period in the middle of next year.
Currently, the combined AMP/ AXA gets two in every six investors automatically allocated by the IRD.
In general other managers have chosen a more balanced asset allocation approach leaving them less exposed to the spikes and troughs of any individual asset class.
That’s the basic philosophy behind the asset allocation of the top-returning default fund, that of Onepath, owned by the ANZ Bank, though it does seek to make money from having higher weightings in asset-classes it expects to perform better, and lower weightings in those it expects to struggle.
Graham Ansell, Onepath’s general manager of investment management, said of the default funds: ‘‘Asset allocation has been the major driver of difference in returns.’’
He added of large cash positions: ‘‘We would describe taking those sorts of position in a conservative fund as a pretty extreme position.’’
Not everyone casts a negative tone on the big differences in the default funds.
Morningstar’s Chris Douglas said in one sense it was good that investors had a choice of such differently structured funds, but be believed the differences were not well understood.
Choice is generally seen as a good thing, but the default funds are there to provide a much more generic, low-risk outcome for investors who can’t decide for themselves where to put their money.
The default fund landscape is tipped to change in other ways as a government review of them is under way. That review is expected to reduce the number of default funds.
Even though longer-term investors would theoretically be better off in higher growth default funds, Stubbs said there would be a political risk to any change that made them riskier.
‘‘I don’t think they will change it dramatically because there is a moral hazard in telling people where their money should be.’’
It was up to the providers to educate KiwiSavers. Tower, for example, has a call centre contacting default fund members – starting with the ones with the biggest balances – to talk about whether they are in the right fund.
Around 80 per cent of those Tower contacts have chosen to shift to higher-growth funds.