Our comprehensive review of Conservative KiwiSaver fund performance to March 31, 2016, identifying who has the best long-term returns

By Craig Simpson

Conservative KiwiSaver funds have weathered the recent bout of volatility well. With the turmoil offshore you would expect there to be some contagion flowing through our domestic markets however we have not seen evidence of this from the data we are receiving.

Bond returns have improved as investors shun equities in favour of more consistent income and lower volatility. The influx of capital into bonds has the effect of lowering the yield and thus improving capital values (on paper) for those currently invested. The opposite holds if we see a spike in global interest rates or investors selling local bonds and moving the capital to other parts of the market or offshore.

The NZ share market continues to hit record high levels as fund managers continued to allocate capital to domestic over Australian equities.

Many of the global equity indices were in negative territory for the last 12 months, while in contrast NZ shares have posted returns in excess of 15%.

NZ domiciled assets have been some of the best performers globally in what has been a testing quarter and end to the year. Many of the major indices were in negative territory at year end however none of the KiwiSaver funds we monitor recorded negative one year returns.  

Our regular return savings model the return from the Kiwi Wealth Conservative Fund has retained its top spot.

Assuming you had been invested for the period April 2008 to March 2016, the difference between the average return of the top five Default funds and Conservative funds in dollar terms currently sits at $2,142. This means an investor who is invested outside of the top Conservative fund would be better off in a Default fund. This goes against the principle that a Default fund is a short term holding place for KiwiSaver funds until such time as the investor chooses a long term strategy.

Here are the full comparisons to March 31, 2016 for Conservative Funds.

Conservative Funds				Cumulative$ contributions (EE,ER,Govt)	=+Cum net gains after all tax,fees	Effective* cum return	=Ending Value in your account	Effective last 3yr return%p.a.
Since April 2008	X	Y	Z
to March 2016					$	%p.a.	$
Kiwi Wealth Conservative	C	C	C	26,471	8,632	5.7%	35,103	5.1%
ANZ OneAnswer NZ Fixed Interest	C	C	FI	26,471	8,575	5.6%	35,046	4.3%
ANZ OneAnswer Int'l Fixed Interest	C	C	FI	26,471	8,277	5.4%	34,749	4.9%
AMP Cash	C	D	Ca	26,471	5,108	3.3%	31,579	2.9%
Mercer Cash	C	D	Ca	26,471	4,787	3.0%	31,258	2.5%
Grosvenor Enhanced Income	C	D	C	26,471	4,826	3.1%	31,297	2.5%
ASB Cash	C	D	Ca	26,471	4,871	3.1%	31,342	3.1%
Fisher Funds Two Preservation	C	D	Ca	26,471	4,829	3.1%	31,300	2.7%
Aon Nikko AM Cash	C	D	Ca	26,471	4,677	3.0%	31,148	2.6%
ANZ Default Cash	C	D	Ca	26,471	4,622	2.9%	31,093	2.6%
ANZ Cash	C	D	Ca	26,471	4,543	2.9%	31,014	2.7%
Westpac Cash	C	D	Ca	26,471	4,528	2.8%	30,999	2.7%
ANZ OneAnswer Cash	C	D	Ca	26,471	4,394	2.7%	30,865	2.6%
Aon ANZ Default Cash	C	D	Ca	26,471	3,746	2.3%	30,217	2.2%
Craigs fixed Interest	C	D	Ca	21,509	3,858	3.4%	25,367	1.9%
Kiwi Wealth Cash Plus	C	D	Ca	12,204	1,958	3.4%	14,163
Kiwi Wealth Cash	C	D	Ca	11,627	1,793	3.1%	13,420
Milford Conservative	C	C	C	11,493	3,430	8.9%	14,923	7.5%
BNZ Cash	C	D	Ca	9,990	1,523	2.7%	11,513	1.5%
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Column X is interest.co.nz definition, column Y is Sorted's definition, column Z is Morningstar's definition
C = Conservative, D = Defensive, Ca = Cash, FI = Fixed Income

Conservative fund observations

The trend of returns from Default funds outperforming a majority of the Conservative funds continues and we are again finding ourselves questioning the worth of having a Conservative category within KiwiSaver as investors are better served at present being in one of the top performing Default funds.

Kiwibank's Conservative fund stands out primarily as it is a diversified fund with exposure to offshore equities as well as fixed income and cash assets. Interestingly the two ANZ OneAnswer single sector fixed income funds are not that far behind Kiwi Wealth's portfolio on the long run returns.

Kiwi Wealth have an exposure to global equities in their diversified portfolios and as such have seen their returns pull back. Kiwi Wealth has made a conscious decision not to invest into NZ shares as part of their investment mandate.

In terms of the bond components Kiwi Wealth has a tilt towards high credit quality global credit, whereas ANZ OneAnswers portfolios have tended to be more government bond focused according to their previous disclosure statements. Kiwi Wealth's portfolio is not as heavily invested into NZ bonds as other KiwiSaver funds as the manager believes current credit spreads in NZ do not constitute a compelling investment case, compared to offshore equivalents. However, should NZ credit spreads become attractive relative to global spreads the Kiwi Wealth would consider positioning more of the portfolio in New Zealand.

Government bonds have been outperforming corporate bonds both in NZ and globally (as measured by their respective benchmarks) over the past 12 months and the ANZ portfolios are benefiting from this. We note that global corporate bonds have pegged back some of the return deficit in the last quarter.

We also understand there are some previous tax credits the Kiwi Wealth fund has received for losses made following a change to the way tax is accounted for on foreign currency transactions within the portfolio. These tax credits are not directly reflected in the unit pricing data provided to us and therefore, are not used, or reflected in, our regular saving return calculation. The regular savings return calculated for this period will be potentially understating the performance of the fund. The same issue will apply in any other fund that has tax credits held within the fund and not reflected in unit pricing provided to us.

With interest rates trending lower, volatility remaining elevated, and the US Fed holding off hiking their rates, we could see bond markets continuing to perform well.

If we were to see the RBNZ cut rates the returns from cash and those funds with heavy cash components could find themselves languishing further behind the leaders.

Since inception, and on a regular savings basis, the average of the top five Conservative funds (excluding Default funds) has produced compound annual returns of 4.5% after all fees and taxes. Over the past three years, that return has edged down to an average of 3.6% p.a.

Capital Guaranteed Funds

In addition to the mainstream Conservative KiwiSaver funds, savers interested in risk-protected returns should consider Westpac's capital 'guaranteed' funds.

These funds invest in equities but have a Capital Protection Plan that's 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:

Please note: The Westpac Capital Protected Plans are not open to new investment.

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

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 March 2016 review of the Default funds can be found here.