Our comprehensive review of Default KiwiSaver fund performance to March 2016, identifying who has the best long-term returns

By Craig Simpson

Continued downward pressure on global interest rates is providing conservative investors with a fairly smooth performance ride.

By conservative, we mean a strategy that has over 70% invested into cash, fixed income (bonds) or other defensive style assets. These types of portfolios are doing exactly what they are designed to do, provide capital (or downside) protection in the face of high levels of market stress or uncertainty.

There has been a fair amount of doom and gloom across equity market commentary with most of the 'Chicken Little' scenarios centering around the slowdown in the Chinese economy (again) and the contagion effect this has on Asian markets and other emerging economies who are dependent on China for trade.

KiwiSaver investors should be ignoring the headlines and concentrating on their long term objectives. The sky is not falling, it's just a bit cloudy for the time being.

Clear blue skies have existed for the NZ sharemarket over the past few years as investors keep supporting the local market. The influx of KiwiSaver and international money is certainly providing the market with the oxygen it needs to continually defy gravity.

As long as brokers and fund managers believe NZ shares continue to add value and an appropriate risk adjusted return then the market should keep climbing.

ANZ Default scheme dethrones Mercer

Looking at the Default fund KiwiSaver regular savings returns for the quarter ending March 2016, ANZ has dethroned Mercer to take the top spot on the leader board, although there is very little in the return differential. ANZ's long run return has come in at 6.4% p.a. after tax and all fees.

The difference in accumulated wealth between the ANZ Default Conservative Fund and the average of the top 5 Cash funds was previously $4,496 - it is now $5,013. The margin over the cash funds continues to expand.

Our performance table below looks specifically at the performance of the current nine Default options available. The bottom four funds in the table were either added recently or do not have a long enough track record to allow for meaningful comparisons against those funds which have been in KiwiSaver since April 2008 when our analysis commences.

Since inception, on a regular savings basis, the average compound average annual return of the five Default funds that have been in operation since April 2008 is 6.0% p.a. (an improvement over the previous quarter's 5.8% p.a.). This rate of return on an after tax and fees basis is still well ahead of what investors are getting on longer dated term deposits at present.

We have noted a high degree of return stability across the main Default funds and they continue to hover around the 6% range since inception. The last three year returns have come down and are sitting below the longer term returns.

Assuming you had been invested for the period April 2008 to March 2016, the difference between the average return of the top and bottom Default fund since our analysis begain is approximately $1,633 (previously $1,880). We are continuing to see contraction in the gap bewteen the top ranked and fifth ranked Default fund.

The ANZ Default Conservative fund has the highest return over the full period of the review, however as the three-year return is not either higher than the longer run return, or the best across the shorter period, we are not able to call it best in class within this review cycle.

We note that ASB's Default fund has the best three-year return across those funds that have sufficient data. Of the best performing funds ASB has the least variance between long run and shorter term returns. 

Here are the full comparison to March 31, 2016 for Default Funds.

Default Fund observations

The lastest round of performance data sees ANZ takeover the top spot from Mercer. There is however very little difference between the two return wise.

There are however some subtle asset allocation differences between the ANZ and Mercer funds, with the later holding considerably more cash which will be reducing both the volatility profile and the overall return.

The ASB Default Fund is predominately passively managed (index conscious) while many of the other Default Funds adopt a more active approach. The positioning of the ASB fund near the top of the leader board suggests to us that while the active managers are stilll adding value there is some erosion in the premium they are returning.

The lower levels of fees charged by the ASB fund will also be assisting in closing the performance gap. 

Declining offshore equity returns globally have been offset by strengthening bond and domestic share returns.

Shorter term returns are holding above 5% for most funds and there continues to be a high degree of stability in the performance of this segment.

Recent OCR cuts have meant cash returns will be deteriorating further as the banks and financial institutions reduce deposit rates.

Factors impacting on KiwiSaver portfolios 

Nervousness across markets has encouraged a flight to safety. Investors have been purchasing US Treasury securities and we have seen the yield on the benchmark 10-year rate fall from 2.3% down to 1.6% in February. The 10-year Treasury finished the quarter at just over 1.8%. 

NZ bond yields have followed a similar path with most of the government bonds on offer in the market trading at yields under 3%. Our interest rate chart shows the decline in yields and this can be found here.

The upshot of these falling yields for investors in the Default funds is they have received a nice capital return kicker from the local bonds. The quantum of the return increase will depend on the managers exposure to either corporate bonds or government bonds. The local A grade corporate bond index returned 2.7% for the quarter while the government bond index was up 3.9%.

Global bonds which most (if not all) NZ managers fully hedged NZ dollars have received an additional boost lately as the NZ dollar has firmed against many of the major trading partners. Over the last three months however, the hedged positions will have been a drag on performance as the kiwi dollar had depreciated against the major currencies.

Portfolios with sizeable exposures to NZ and US equities will have fared better than those with tilts to European or Asian shares. Although March saw a strong rebound in equity markets, the damage done in January and February meant many of the major indices finished under water.

The local NZX50 index rose nearly 7% for the quarter, but this was not quite as good as the NZX 10 index which measure the strength of our 10 largest companies, this was up 9.85% over the same period. After having been down over 10% at one stage during February, the S&P500 index managed to squeeze out a small positive return for the quarter.

Many of the managers we follow and analyse continue to hold under-weight positions to Australia. We say underweight, coming from the perspective that Australia makes up roughly 2% of global GDP and NZ is next to nothing and yet the Australian exposure within portfolios is very small and sometimes non-existant.

We can understand this position especially when the yield on NZ shares is superior and our economy appears to be more robust. Australia also has substantial exports to China, so the slowdown in the Chinese economy and the lower demand for Australian commodities will be hitting them harder, than it does NZ.

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KiwiSaver default funds are only part of a broader range of conservative funds available. Many of the 'traditional' Conservative and Cash funds are underperforming the Default funds. We will look at the rest of the Conservative funds in another article.

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 your life stage.

You should move only with appropriate advice and for a substantial reason.