Home bias risk pays off for KiwiSaver managers; market volatility continues but long term returns remain positive; no 'best in class' award for Aggressive fund category

By Craig Simpson

Continued return contraction across the KiwiSaver categories, increased volatility, a declining NZ dollar and China were all core themes woven across KiwiSaver returns to 30 September.

Negative returns across terms of up to one year were common across the more aggressive KiwiSaver funds.

More conservative or defensively positioned portfolios generally only suffered moderate declines over the short term.

Home bias risk pays off

KiwiSaver investors whose funds have been predominately invested in NZ domiciled assets (shares, bonds, property) have done better than those with a more diversified global exposure as a general rule.

The New Zealand market makes up such as small part of global markets it is surprising managers have such a love affair with local assets. Home bias investing is not new as a global phenomenon and is probably acceptable if you are based in a major market. However in New Zealand we struggle to see why managers are not diversifying more.

Familiarity with the companies, their competitors and access to key management personnel may be part of the rationale. However, exposure to small and relatively illiquid markets is risky. In recent times having a home bias appears to have compensated investors for this risk.

There will come a point where the local market is over-saturated with KiwiSaver money looking for a home and opportunities to profit become harder to come by.

If this were to occur we expect KiwiSaver funds will be forced to either shift focus to global markets or seek more private investment in unlisted business or private equity style opportunities.

Investors need to be aware of the inherent risks of private equity style investments. Sometimes you hit a home run, other times you will strike out and lose your money.

Liquidity ratio information is included in manager annual disclosure statements and investors should take an interest in this number as if liquidity drops, the risk goes up. If the risk goes up investors may find the fund they are currently in is no longer matching their risk tolerance or profile.

Another domestic asset class performing above global counterparts is NZ bonds. Returns from local government bonds have been well above other alternatives. Corporate bonds, although performing well, have under-performed government bonds both domestically and globally as investors seek safe harbours for their cash.

NZ government bonds are included in global bond indices so there is a ready supply of buyers to help drive down yields and underpin returns.

Decline of best in class performers

As returns have trended negative we have observed that the gap between three year and long run returns has closed and the number of managers being assigned our 'best in class' award has reduced. There is no longer a best in class performer in the Aggressive KiwiSaver category.

A KiwiSaver manager is awarded 'best in class' if their three year return is equal to or greater than their long run return based on our unique regular savings model.

The negative returns filtering through over recent quarters are eating into investor's short term returns and KiwiSaver balances. Our data and analysis suggests that many of the six month to one year returns are likely to be negative at year end.

Longer term data is showing continued growth across the board and improvement in the returns as we progress up the risk spectrum, as you would expect.

The days of double digit returns, we believe, are almost over and investors should be settling for more modest and consistent performance from managers in the medium term.

Return drivers

A manager's hedging position has been a major influence in how the various funds have performed both during the quarter and over the past twelve months.

With the NZ dollar falling quickly those managers with low or no hedging in place have seen an immediate boost to returns. This position can of course turn quickly should the NZ dollar return to the previously heady and unsustainable levels against our major trading partners.

Currency positioning was not the only driver behind returns. Asset allocation has also played a reasonably large part. Funds that have adopted a home country bias have in general terms tended to perform better than those with more diversified offshore exposures. A home country bias is not without risk as the markets in NZ are not as liquid or diversified and this needs to be taken into account when assessing a KiwiSaver manager's relative performance against its immediate peers.

The China story is no longer grabbing the same sensationalist headlines it once was. But still the slowdown in the world's second largest economy is being felt globally and will do for some time especially if Chinese officials continue to downgrade growth forecasts.

Investors should be expecting market volatility until at least the end of this year as there remains a level of uncertainty around when the US Federal Reserve (Fed) will hike interest rates, or whether they will hold off as the US economic data is failing to meet expectations.

We are still seeing some very good results coming through despite the gloomy headlines and market turmoil and this should be encouraging KiwiSaver members to stay focused on their overall strategy, and not switch in and out of different funds purely based on short-term events.

SmartKiwi exits KiwiSaver as BNZ chases first home buyers

The SmartKiwi Growth Fund has been closed to new investors and the funds have removed this fund from our performance ranking tables.

BNZ has added to its current suite of funds offering First Home Buyers a specific KiwiSaver Fund. Predictably the fund is designed to be conservatively managed, has a large cash and fixed income component and is for those with short investment time horizons. While the pricing is fair there are other alternatives we have highlighted in our story here.

Best of the best

The funds to be awarded or special 'best in class' badge across all the various categories are listed below. These funds are the best of the best as at the end of September 2015 in our opinion. Interestingly no one institution is the leader in more than one category. We could be seeing the emergence of a "horses for courses" theme, where particular managers are showing they have specialist skills in specific areas or risk classifications. In the June quarter ANZ and Aon were best in class in two different categories. Mercer and Kiwi Wealth continue to lead their respective categories.

Default: Mercer Conservative Fund

Conservative: Kiwi Wealth Conservative Fund

Moderate: Aon Russell LifePoints 2015

Balanced: AMP Nikko AM Balanced

Growth: ANZ OneAnswer Balanced Growth Fund

Aggressive: not awarded. Top fund is the Milford Active Growth Fund.

The table below highlights the best funds in each main class, and the range of returns between the top and bottom performers.

This is the list of the top funds as at September 30, 2015 based on our regular savings return model. For the purpose of comparison we have only used those managers who have been in existence for the entire analysis period of April 2008 to September 2015.

Category	Top 3 Funds	Average of Top Five after fees after tax	Average of Bottom Five after fees after tax	# of funds invested for full period	Top long-term return after fees after tax
Aggressive		11.8%	6.6%	21
#1	Milford Active Growth				12.5%
#2	Aon Milford
#3	ANZ OneAnswer Australasian Property
Growth		9.1%	6.9%	17
	ANZ OneAnswer Balanced Growth				9.3%
#2	Aon Russell LifePoints Growth
#3	ANZ Balanced Growth
Balanced		8.3%	6.5%	13
	AMP Nikko AM Balanced				8.5%
#2	Aon Russell LifePoints Conserv
#3	ANZ OneAnswer Balanced
Moderate		7.3%	5.7%	13
	Aon Russell LifePoints 2015				7.6%
#2	Aon Russell LifePoints Conserv
#3	ANZ OneAnswer Cons. Balanced
Conservative1		5.1%	n/a3	7
	Kiwi Wealth Conservative				6.1%
#2	ANZ OneAnswer NZ Fixed Interest
#3	ANZ OneAnswer Int'l Fixed Interest
Default2		6.1%	n/a3	9
	Mercer Conservative				6.8%
#2	ANZ Default Conservative
#3	ASB Conservative

1. The Conservative Fund data in the table excludes cash and default funds.
2. There are now nine default funds, however only five have been in existence for the full period of our analysis.
3. Insufficient number of funds to provide data.

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

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 September reviews of the Default, Conservative, Moderate, Balanced,  Growth and Aggressive funds can be found here, here, here, here,  here and here.

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