We review regular savings returns to December 31, 2014 for conservative & default KiwiSaver funds

Still in a default KiwiSaver fund?

Is that just because you have not got around to thinking about what to change to, and how to change?

Or do you think "they all return about the same"?

The long term track records of all funds are now available and it is clear how to compare that track record.

Default funds are producing returns that are weakening as time elapses. They share this unfortunate feature with Conservative funds.

Since inception, and on a regular savings basis, the average of the top five funds has produced compound annual returns of 6.25% p.a. But over the past three years, that return has been only 6.06%.

True, that is better than bank term deposits, but it is much weaker than Moderate, Growth or Aggressive KiwiSaver funds.

In contrast, Moderate, Growth and Aggressive funds have been improving as time elapses, especially over the past three years.

You give up a lot by being in a Default fund rather than a Moderate fund, even more by accepting more risk into the other types of funds.

On our regular savings basis, you would be better off by $2,118*. While that may not seem a lot based on your ending fund value of $31,178* it is very significant when you realise that $22,818 is what you, your employer and the Government contributed. The average Moderate fund earnings after-tax and after-fees is $2,118 more than the $6,242 you would have earned in a Default fund*. That's more than a third more!

The conservative and default funds are those found down the bottom of the risk spectrum and have greater allocations to fixed income and cash within their strategies.

The returns from this category are expected to have low and stable returns over time and the chances of losing capital in any one year will be reasonably small.

The default fund asset allocation is determined to a large degree by a mandate which is similar for all managers and is set by Government and their advisers.

There is a range for each asset class that managers can move within but essentially the differences between all nine default fund asset allocations should be within cooee of each other.

As new entrants into the KiwiSaver and/or Default classification there is minimal data for BNZ and insufficient data for Westpac, Kiwi Wealth and Grosvenor to be included in the performance table.

Across the default funds not a lot has changed in terms of rankings from the last summary of the category. ANZ and Mercer continue to be the stand-out performers.

BNZ's recent track record is impressive, however it is too early to tell if this short-term data can be used as a proxy for potential longer-term performance.

The average return across the default funds which have been going since April 2008 (excludes BNZ, Grosvenor, KiwiWealth and Westpac) has been 6.1% which is above the average of 3.8% for all the funds we have categorised as conservative under KiwiSaver. Our conservative categorisation also includes Cash funds and the return from this segment of the KiwiSaver universe.

Cash returns have averaged around 3% since April 2008 and the inclusion of these funds in the Conservative category has a substantial impact on the overall sector average. Excluding Cash funds from the equation the average Conservative sector return would rise to be approximately 5.4 . For the last three years the Default funds have returned on average 6.1%.

Over the shorter three year period a majority of the funds have exceeded their long run returns. Five funds have failed to better their long term numbers over the last three years namely: AON Russell Lifepoints Conservative which is ranked near the top of the table on long run returns; AMP Conservative Fund; Grosvenor Conservative Fund (Grosvenor are a newly appointed default fund manager); ANZ OneAnswer Conservative Fund and Craigs Conservative Fund.

Very few funds have managed to produce higher three year returns compared to the long-run numbers. The exceptions are KiwiWealth Conservative Fund, Lifestages Capital Stable Fund and AMP Default Fund. ANZ, KiwiWealth and Mercer are the stand-out performers over the past three years.

In a number of cases the lower short term returns can be explained by a combination of: 1) a lack of exposure to equities (which have performed remarkedly well); 2) capital losses incurred on bond investments due to increasing interest rates and 3) low (or negative) interest rates for Cash.

As expected all the cash funds appear at the bottom of the return table. The Staples Rodway Conservative Fund invests solely into cash and short term deposits and hence why this fund is found performing in line with cash funds in this sector.

Here are the full comparison as at December 31, 2014 for Conservative & Default Funds.

For most default funds, the last three year's return are on a par with the lifetime returns and the long run returns are proving to be stable with low levels of volatility.

KiwiSaver default funds are only part a broader range of conservative funds available. Many of the 'traditional' Conservative and Cash funds are underperforming the Default funds. Here is the full list:

For those funds which have not been in existence for over three years their results are shown in the table below.

In addition, savers interested in risk-protected returns should consider Westpac's capital 'guaranteed' funds.

These funds invest in equities but have a Capital Protection Plan is designed to give you the opportunity to earn the higher returns normally associated with growth assets without the risk of losing your initial contributed capital (other than through the insolvency of the Capital Protection Provider or a "tax change event"). The goal of generating higher returns is implemented by having as much of the CPP Fund as possible invested in growth assets.

However, the manager is also required to preserve the capital value of the Fund. It does this by reducing the amount invested in growth assets if the value of the assets of the CPP Fund falls below certain predetermined levels. Instead, some (or, if there is a very dramatic fall in the value of the growth assets, all) of the assets of the CPP Fund are placed in a form of deposit with the Capital Protection Provider that is designed to recover part of the value of the assets over time, but does not produce a positive investment return (these are sometimes called zero coupon bonds or deposits).

Westpac has five such plans, all starting at different times:

Don't jump into these types of funds unless you understand fully how they work in good times, and bad.

The following funds have not been going long enough to be included in the above table.

For explanations about how we calculate our 'regular savings returns' and how we classify funds, see here and here.

There are wide variances in returns since April 2008, and even in the past three years, and these should cause investors to review their KiwiSaver accounts especially if their funds are in the bottom third of the table.

The right fund type for you will depend on your tolerance for risk and importantly on you life stage. You should move only with appropriate advice and for a substantial reason.

Our December review of Moderate Funds is here.

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* These numbers are the average of the top five funds