KiwiSaver - Confessions from an Adviser
I find it hard to keep up with the world these days - am I slowing down or is it getting faster?
As we've become more connected in this digital age I would argue we've become more disconnected. With the multitude of information and news sources available across all platforms - print (yes - some people still read newspapers), television, online, social media - it is a case of trying to keep up with the volume of "latest breaking news". In the information age most of our opinions are formed from headlines or a tweeted summary. The outcome is we invariably live on sound bites and talking points. There is limited in-depth reporting and to gain attention stories need sensationalism or a victim.
So, I was somewhat amused the other day when the annual articles relating to investment performance of KiwiSaver funds were printed. There are the usual catch cries of "Best Performing Fund" or "Are You Paying Too Much In Fees?" or "400,000 Kiwis missing out".
All are designed to draw you in or at least leave you with an impression regarding KiwiSaver. In my opinion, often the impression can be misleading or focuses on the wrong aspect.
Take the article on fees for example. There is a range of fees and services provided to KiwiSaver members by the Trustee, the Administration Manager and the Investment Manager. Some of the fees are fixed costs and applicable whether there is one member or 100,000 members in the fund. These range from accounting fees and staff costs to systems and reporting costs. Other fees are variable and often related to fund size. Such as the investment management fee - often on a sliding scale depending on total funds managed. Also there will be variable costs for custodial requirements and asset acquisition and disposal (e.g. sharebroker fees for equities). The investment management style of the fund (eg. Passive vs Active) also impacts costs - an Active management style will require more staff and analysts. So, there are many variables factored into the applicable fees. To simply compare the fees of one provider to another does not give the full picture. That's not to say fees are not important in considering a KiwiSaver plan but being in the appropriate fund for you is more important than just comparing the fees.
I always love the "Best Performing" articles and this year didn't fail to humour me. One of the Top Five Performing funds for the past year had a total of $4.5 million dollars in total assets and just 300 investors. This is not to knock that particular fund manager - the results are what they are. However, unless you sought out the facts on fund and membership size you could well ask why is my own fund manager not producing similar results.
If only 10% of us transferred to this year's star performer I can safely say the investment return next year would not likely be in the top five.
The other problem I have with this type of article is it doesn't really do the average KiwiSaver member much good - for me it falls down in three areas.
- It is after the fact. The investment performance is the result and you can't influence it retrospectively. It plays to our emotions of either greed or envy - "I should've been in that fund and I would be better off". Or, "their fund has out-performed mine".
- It highlights one year returns. The majority of KiwiSaver members will be invested for in excess of 25 years - it is a long-term investment. Comparisons of performance are now available over a 10 year period. To me this has far more relevance as to the ability of a fund manager. It usually shows consistency, stability and scope to grow with the market and fund size.
- Result comparisons across funds with significantly different investment strategies and mixes. Even where broad categories (think Balanced Fund) are presented, not all Balanced Funds are created equal. The asset allocations in Balanced Funds range from 33% to 62% in Growth Assets (Shares and Property). Depending on sharemarket performance these "Balanced Funds" will have widely differing returns.
As an investor you have to be forward looking. While we would all like to have the best performing fund each and every year the investment return is dependent on the decisions we make at the start of the year.
There are some generally accepted rules around investment - from being diversified to recognising that greater returns usually require greater risk. Time in the market usually produces better returns than trying to time the market (moving in and out of assets trying to buy the troughs and sell the peaks).
On top of this you need to determine your objectives - how long will you invest, preferences for investment styles and strategies, tolerance to investment risk, how does it fit with your other investments, are ethical investment options important to you.
These factors are more important to define so you
know you are in the right fund for you. The performance
of your investment will be what it will be. While you
might be surprised on the upside when markets are
buoyant, hopefully in poorer performing years the impact
is not too great and within your comfort zone.
In short, performance is the outcome of the process.
There are a couple changes coming to KiwiSaver this year.
- If you are over 65 you can now join.
- Contribution rate options for employees have been extended to include 6% and 10% of salary.
- For members over 60 - access to funds is immediate at age 65 (there is no 5 year minimum membership requirement).
One take away I got from this is for anyone over 65 who is using managed funds or unit trusts as an investment vehicle is that using a KiwiSaver Fund may be a better option. You still have immediate access to your funds but generally we see KiwiSaver funds have lower expense ratios for comparable unit trusts with the same provider.
There is nearly $60 billion in KiwiSaver Funds and nearly 3 million members. This is a tremendous effort over the 12 years KiwiSaver has been running.