Is your nest egg all it’s cracked up to be?
As KiwiSaver approaches its 12th anniversary, there is growing interest in the performance of funds. In the second of a three-part series Tamsyn Parker looks at what to do if your KiwiSaver fund is a poor performer
Finding out your KiwiSaver fund ranks at the bottom for its performance is not a reason to panic but is a warning sign that you need to be looking into why, experts say.
Tom Hartmann, managing editor at the Commission for Financial Capability — the Government’s financial education arm — said the general rule is that past performance isn’t a guide to future performance but that doesn’t mean you should ignore it completely.
“What you’re looking at is information that has already happened. Results that are historic. We are not going to see exactly that same thing going forward.”
But, said Hartmann, if your fund has been consistently under performing against its peers for a significant period of time, you should look deeper because it could be a sign of high fees or poor management.
“Consistent under performance in the past does not bode well for the future,” he said.
Deborah Carlyon, a financial adviser at StuartCarlyon, said it was important not to just take the return at face value.
“Delve into it and get an understanding of why.”
Carlyon said fees and asset mix were some of the biggest drivers of returns.
“Fees are a big hurdle. It [high fees] is always going to be a drag.”
Ayesha Scott, a finance professor at AUT
University, who specialises in KiwiSaver research, said a poor performing fund might be making the same returns before fees as everyone else, but investors were getting less in the hand because the fund was charging more.
“That is something investors can decide to switch upon,” she said.
The Government’s new Smart Investor tool allows people to rank funds based on their fees and compare them to the average across the sector.
But it is also important to compare like for like.
Many of the funds with the cheapest fees use an index tracking investment approach
which is based around computer algorithms. The alternative, and the approached used by the majority of KiwiSaver providers, is active management in which the fund manager picks which companies they invest in.
Scott said she followed the academic literature which pointed to no advantage over the longer term for active management.
“I personally don’t see paying for an active manager as value for money.”
But she said there may be an argument for paying more in fees if a manager is doing something specific such as ethical investment.
“If you are investing in ethical companies, that really research intensive stuff, there is perhaps an argument for paying for that.”
Scott said that, for some people, where the money was invested was a bigger concern.
“Not everyone is chasing returns. Many people want to know if their money is invested ethically.”
Carlyon said the asset mix of a fund could also make a big difference.
KiwiSaver funds with a higher exposure to the New Zealand sharemarket and listed property funds would have had a better return in recent years as those sectors had done very well.
KiwiSaver provider KiwiWealth has argued that the reason for its funds’ poor performance in the conservative and balanced sectors has been a tilt to invest offshore across its growth investments compared to the rest of the industry which has more invested in Australasian assets.
The provider has said it made this decision because New Zealanders were already very exposed to their own country, typically having a job here and income linked to New Zealand, as well as exposure to the housing market.
Looking over long-time horizons of 15 to
20 years plus, KiwiWealth has said global markets were typically better performers.
Carlyon said that kind of decision was a big call for a fund manager to make and investors should be made aware of it when choosing the provider. But, likewise, the experts said investors should avoid choosing a fund manager based solely on it having the top returns.
“What people shouldn’t do is just move to a fund that did well last year,” Carlyon said.
The fund could have invested in a sector that did really well last year and is now headed for a lower growth period.
“You can not predict the future,” says Hartmann. “Trying to predict the future [performance] is like being a fortune teller.”