Our comprehensive review of Moderate fund regular savings returns as at March 31, 2016, identifying who has the best long-term returns

The main themes for the past quarter have been share market volatility; continued downward pressure on interest rates; the ongoing focus on China's economic slow down; the sudden decline in the oil price and the stellar performance of domestic bonds and equities.

Since the middle of 2015 we have seen increased volatility across share markets and heightened levels of risk aversion. The threat of a protracted economic slowdown in China has certainly spooked investors. The Chinese central bank have intervened to hold up the value of the Yuan and in turn provide some stability to the local market.

The rapid decline in the price of oil has seen an estimated 250,000 jobs be cut. Western sanctions on Iran have now been lifted and there are concerns the increased level of supply will easily exceed demand and this keep the oil price depressed.

Against these substantial head winds, positive economic data is hitting the wires. US economic data is showing continued improvement and corporate profits remain healthy. The Fed has signaled if the US economy continues to improve and the global scene settles they will begin to hike interest rates. Two hikes during 2016 have been indicated already, down from the four indicated earlier.

Domestic assets continue to be the bright light. Global equity markets were broadly lower over the past year in local currency terms. March saw strong bounces in equity indices however the rise was too little too late to ensure we finished the quarter in positive territory.

All funds in the Moderate KiwiSaver category recorded positive returns for the year on a before-tax-and-after-all-fees basis, which you would anticipate given the high allocation to income bearing investments in the strategy and falling bond yields.

At present Moderate KiwiSaver funds have approximately one third of their capital invested into growth assets (e.g shares), the remaining two thirds is in assets such as bonds and cash.

The larger exposure to bonds and cash has offset the loses made on the international growth assets. The long run returns are holding at similar levels to the last review to the end of December.

Over the full term of our regular savings analysis, the top 5 Moderate funds compared to the 5 Default funds which have been going since April 2008, Moderate funds have delivered an extra $2,654 worth of returns on average after-tax-and-all-fees.

Aon Russell LifePoints 2015 has reached its target date and is no longer included in our analysis. This fund was, up until the end of December 2015, the top performing fund in this category. Aon have launched a new 2055 fund and this will be included in our analysis once we have a few more months data.

Here is the comparison to March 2016 for Moderate Funds:

Those funds that have recently launched, or do not have a long enough track record to be included in the main table above, are shown below:

Observations and factors driving performance

As we highlighted in our review of Default funds the main factors impacting KiwiSaver balances continues to be centred around China, the rapid decline in oil prices, spikes in equity volatility and fresh concerns around a British withdrawal from the EU (Brexit). To find out more please refer here.

We are seeing three-year returns fall away compared to the longer term data. It would not surprise us if we continue to see some return contraction in the shorter term. Returns around the 5.0% to 5.5% range after tax and fees is a guide as to what an investor should be expecting from a conservatively managed portfolio of bonds and cash plus a dash of growth assets thrown in to try and inflation proof the capital over the long term.

The continued low interest rate environment will not be dragging the returns back in those funds holding larger cash balances, especially as much of the cash is held in NZ banks on short term deposit or call.

Funds with a greater bond exposure and minimal cash will have benefited from the general 'flight to safety' and the ensuing fall in global bond yields. The return attribution to the portfolio of these falling yields will largely depend on whether the manager is invested domestically or globally and whether there is a bias towards government bonds or corporate bonds. Government bond indices are tending to outperform corporate bond indices over the past 12-months but the margins between the two are quite small.

In the early part of the quarter we saw credit default swap (CDS) spreads (a measure of potential default and credit risk) widen as investors became more sensitive to negative headlines. Markets have settled down, relatively speaking, and so too have investor nerves. CDS spreads remain elevated but are now back at levels last seen in early December 2015.

The equity exposure and contribution to the overall portfolio return is an important consideration. Funds that are more globally diversified will be finding the equity component is generally a return detractor.

Strategies that have a market or overweight position to US shares will have fared better than those with larger European or Asian allocations. The US market is one of the few major developed markets to finish the quarter in positive territory (in local currency terms).

We have observed a majority of managers in the KiwiSaver universe prefer holding NZ shares over Australian shares. One of the main reasons for this will be the superior return and dividend yield profiles for the NZ companies. However, with a strong domestic bias comes some unique risks including trading in a small and often illiquid market.

The top managers in the sector continue to deliver 7% p.a. on an after tax and all fees basis over the longer term which is extremely good when you consider a large number of markets finished in the red for the year in local currency terms.

The Fisher Funds Conservative fund and BNZ Moderate Fund have not been operating for the entire period and therefore their position in the table does not reflect their comparative performance versus other funds in the peer group.

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Across the industry there is currently no consistency on how funds are categorised so readers will see funds with different risk descriptors (i.e. Conservative, Conservative Balanced & Moderate) appearing in the performance table. To learn more about how we categorise the various funds click here.

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.

Our March reviews of Default and Conservative funds can be found here and here.