Investors warming to KiwiSaver, but term deposits and property still 'top of the pops'

By Amanda Morrall

For the first time since KiwiSaver was introduced, the national savings scheme has surged ahead of managed funds in terms of the belief it can generate better returns, according to a survey by ASB.

Jonathan Beale, head of private banking and wealth management, said while term-deposits and property were still "top of the pops'' for New Zealanders, KiwiSaver was starting to seed itself in the collective conscience as a investment of good repute and respectable performance.

"I think when KiwiSaver was launched there was quite a bit of skepticism around it,'' said Beale. "The view was that it would take sometime for people to start to understand and take it seriously and we're finally starting to see that happen. People are starting to look at their balance and say, `Hey, well that's not a bad sum of money.'"

The average KiwiSaver account is now worth about NZ$7,000 with more than 1.6 million New Zealander's enrolled in the scheme. Including employee, employer and Government contributions there is more than $NZ5.8 billion in funds under management.

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While the KiwiSaver pool is but a fraction of the value of retirement savings funds in Australia - worth A$1 trillion -  regard for KiwiSaver has been buoyed by ballooning accounts.

Beale said 61% of respondents surveyed by ASB indicated that KiwiSaver would be their primary source of income in retirement. That's changed from 35% in 2007 when the scheme was first introduced.

That sentiment was strongest among those under 50 years of age who had more time to build up their accounts before retirement.

Expectations versus reality 

Despite the expressed belief that KiwiSaver could outperform other managed funds, Beale said it remained unclear whether those expectations matched reality.

The confusion he said had to do with controversy about performance benchmarks, and rates of return, pre and post-tax and after-fees.

"It's a really difficult thing to compare. It is one of the sensitive issues around KiwiSaver and managed funds. How things really perform?"

Regardless, Beale cautioned investors about a growing trend to "chop and change" KiwiSaver funds on the basis of short-term performance indicators. He said investors chasing high returns on a long-term investment vehicle invariably end up doing more harm than good.

That said, Beale reasoned that now was a good time for KiwiSavers to reflect more seriously on where they were at to determine if they were in the most appropriate fund. While multiple factors played into that decision, risk appetite and time-frames for retirement are two chief guides.

Finding the right fund

KiwiSavers far off retirement could, generally speaking, afford to be in more growth-oriented funds, that is those types of funds with a higher weighting of equities compared to cash and bonds. 

As it stood, Beale said vast numbers of KiwiSavers remained in default funds, which are more heavily comprised of cash and bonds.  That was problematic to the extent that investors might unwittingly forfeit the higher compounded returns that equities have historically been known to deliver over the long-run.

Beale did not know exact numbers but said of the NZ$1.4 billion of KiwiSaver money under management at ASB, NZ$800 million was parked in conservative funds.

With conservative funds having outperformed all others over the past three years that hasn't been a bad thing. 

However,  predictions about rising inflation have some in the industry suggesting those who stay in conservative funds for much longer could suffer. That's because if worst case scenarios about rising inflation come true, the relative modest returns generated by conservative funds could be eaten away by the effects of tax and inflation.

Beale said a change in global economic circumstances and a pick up in investor confidence bode well for a stronger exposure to growth funds. He said the range of funds on the market meant that conservative investors could still remain in that category of fund but notch up their growth exposure slightly.

"When KiwiSaver first started, people were going more for cash and conservative funds because it was so new and markets were volatile and cash was acknowledged as being king. So those funds performed really well over the short-term. But if you look at it now in terms of exposure to growth assets over an 18 month period, it's looking good. And the longer you are in KiwiSaver, you're going to see some consistency in your performance."

Investment gaps widening

While attitudes and awareness about KiwiSaver have noticeably changed, Beale said property remains a perennial favourite. Respondents to the ASB survey rated it second place behind term-deposits as the type of investment most likely to deliver the best returns. Savings accounts took third place.

"The results show that old habits die hard when it comes to rental property,'' he said.

A gradually widening gap between relative returns on term deposits and other investments could see property start to slip in popularity, he wagered.

"Only time will tell."