The worst performers last year were emerging-market equities and commodities, driven by a weaker Chinese growth outlook. Theses sectors didn't fare too well in the first month and a half of 2016 either.
We witnessed a momentum change in the middle of the quarter, almost like someone had flicked a switch and lit a massive fire under these two sectors. They subsequently rallied hard and finished Q1 with gains. The US equity indices were one of the few benchmarks to finish with their head above water at the end of March.
The Federal Reserve (Fed) softened its rate-hiking stance on concerns around the global growth outlook. Interest rates dropped sharply during the first quarter as investors pursued a flight to safety strategy. Bonds outperformed equities across most parts of the market. Many of the funds in this category will have low or zero exposure to fixed income assets so would have bore the brunt of falling equity prices and the spike in volatility.
We have observed some managers are holding what we would term over-weight positions in cash as at the end of the quarter. There had been a deliberate process of reducing equity exposures during the later part of last year and this has provided some downside protection, albeit small.
Those portfolios with a more defensive stance have missed some of the upswing as equities bounced and volatility fell away. The flip side to this is, while the returns might have been a little lower the variability in the returns will have been lower too. It depends if you want to eat well or sleep well as to how you view this scenario.
A majority of the KiwiSaver schemes in this category are providing returns in the last three years that are equal to or above their long run average return. Our regular saving model is showing the benefits of investing a little but often and staying invested and committed to a specific strategy.
The funds with the largest differential between their three year and long run returns are ANZ OneAnswer Australasian Share, ANZ OneAnswer Int'l Share, & ANZ OneAnswer Sustainable Growth.
On our regular savings basis, the average of the top five funds would have resulted in you earning $23,700 more than you have contributed. The top funds have doubled your money (give or take).
The average annual long term compound return of the top five Aggressive funds' earnings after-tax and after-fees is 13.4% which is 7.4% per annum more than the average of the top five Default funds. The top 5 Aggressive Funds are adding over $14,500 more value to investors than the top 5 Default funds.
We would suggest that the additional return offered by the better performing Aggressive funds over and above the Default funds is providing investors with a sufficient risk premia at present. We do have reservations as to whether the Aggressive funds are providing investors with superior risk-adjusted returns given the level of volatility that is occurring from month to month.
Here are the full comparison as at March 31, 2016 for Aggressive Funds.
| Aggressive Funds |
Cumulative
contributions
(EE, ER, Govt)
|
+ Cum net gains
after all tax, fees
|
Effective
cum return
|
= Ending value
in your account
|
Effective
last 3 yr
return % p.a.
|
|||
| since April 2008 | X | Y | Z | |||||
| to March 2016 |
$
|
% p.a.
|
$
|
|||||
|
|
A | A | P | 26,471 | 25,036 | 13.9% | 51,508 | 14.4% |
| ANZ OneAnswer Australasian Share | A | A | AE | 26,471 | 24,561 | 13.7% | 51,032 | 15.4% |
| Milford Active Growth | A | G | AE | 26,471 | 23,092 | 13.1% | 49,563 | 12.3% |
| Aon Milford | A | G | AE | 26,471 | 23,043 | 13.1% | 49,514 | 11.9% |
| ANZ OneAnswer Int'l Property | A | A | P | 26,471 | 22,855 | 13.0% | 49,327 | 12.2% |
| ANZ OneAnswer Growth | A | G | G | 26,471 | 17,808 | 10.7% | 44,279 | 10.8% |
| ANZ Growth | A | G | G | 26,471 | 17,582 | 10.6% | 44,054 | 10.6% |
| Aon Russell LifePoints 2045 | A | G | A | 26,471 | 17,132 | 10.4% | 43,603 | 10.9% |
| ASB Growth | A | G | G | 26,471 | 16,367 | 10.0% | 42,838 | 11.2% |
| ANZ Default Growth | A | G | G | 26,471 | 16,229 | 10.0% | 42,700 | 10.7% |
| ANZ OneAnswer Int'l Share | A | A | IE | 26,471 | 15,854 | 9.8% | 42,325 | 11.8% |
| Fisher Funds Growth | A | A | A | 26,471 | 15,347 | 9.5% | 41,818 | 9.8% |
| Westpac Growth | A | G | G | 26,471 | 15,020 | 9.3% | 41,491 | 10.0% |
| Mercer High Growth | A | A | A | 26,471 | 14,138 | 8.9% | 40,609 | 9.3% |
| Fisher Funds Two Equity | A | A | IE | 26,471 | 12,986 | 8.3% | 39,457 | 8.9% |
| Kiwi Wealth Growth Fund | A | A | A | 26,471 | 12,973 | 8.3% | 39,444 | 9.5% |
| AMP Growth | A | G | G | 26,471 | 12,048 | 7.7% | 38,519 | 7.4% |
| Grosvenor High Growth | A | A | A | 26,471 | 11,712 | 7.5% | 38,183 | 9.1% |
| AMP Aggressive | A | A | A | 26,471 | 10,900 | 7.1% | 37,371 | 6.1% |
| ANZ OneAnswerSustainable Growth | A | A | IE | 25,860 | 10,789 | 7.3% | 36,648 | 9.5% |
| -------------- | ||||||||
| Column X is inte8.5rest.co.nz definition, column Y is Sorted's definition, column Z is Morningstar's definition | ||||||||
| A = Aggressive, AE = Australasian Equities, G = Growth, IE = International Equities, P = Property | ||||||||
For those funds that have not been going for the full period (April 2008 to December 2015) the results are shown below. In this group the standout performers are Craigs NZ Equity, Grosvenor Geared Growth and Grosvenor International Share.
| Aggressive Funds |
Cumulative
contributions
(EE, ER, Govt)
|
+ Cum net gains
after all tax, fees
|
Effective
cum return
|
= Ending value
in your account
|
Effective
last 3 yr
return % p.a.
|
|||
| since April 2008 | X | Y | Z | |||||
| to December 2015 |
$
|
% p.a.
|
$
|
|||||
| Grosvenor Geared Growth | A | A | A | 22,185 | 11,082 | 9.6% | 33,267 | 10.4% |
| Craigs Equity | A | A | A | 21,509 | 8,367 | 7.9% | 29,876 | 6.8% |
| Grosvenor International Share | A | A | IE | 19,159 | 8,572 | 9.8% | 27,731 | 9.7% |
| Grosvenor Socially Responsible | A | A | AE | 19,159 | 7,785 | 9.0% | 26,944 | 7.6% |
| Grosvenor Trans-Tasman Small Companies | A | A | AE | 19,159 | 5,300 | 6.0% | 24,458 | 4.5% |
| Craigs NZ Equity | A | A | AE | 17,385 | 12,795 | 16.3% | 30,180 | 14.3% |
| Craigs Australian Equity | A | A | AE | 17,385 | 4,599 | 6.1% | 21,984 | 3.8% |
| Generate Focused Growth | A | A | A | 9,768 | 2,638 | 8.2% | 12,406 | n/a |
| Amanah KiwiSaver Plan | A | A | 6,522 | 1,273 | 3.0% | 7,795 | n/a | |
| --------------- | ||||||||
| Column X is interest.co.nz definition, column Y is Sorted's definition, column Z is Morningstar's definition | ||||||||
| A = Aggressive, AE = Australasian Equities, G = Growth, IE = International Equities, P = Property | ||||||||
Observations and return drivers
Stock picking (active management) as opposed to index tracking (passive management) is providing the greatest return for investors and has done for some time now.
More of the diversified funds have greater exposures to cash as the managers have positioned the strategies more conservatively and this has dampened some of the returns compared to the single sector funds that are basically fully invested into a specific asset class.
ANZ's suite of products rate highly across many of the sectors and are one of those most consistent performers across a number of sectors.
Some of ANZ's success has centred around having a stable line up of top ranking fund managers across their portfolios and holding an over-weight position to equities compared to what they see as a neutral position as the market transitioned out of the GFC. As markets started to peak and fundamental valuations became stretched the team have started to sell down some of their equity exposure and taken their profits. The current exposure to equities is more neutral at around 80% of the portfolio. The exposure to equities will vary within a range and the positions will be tweaked from time to time depending on their forwarding looking view around markets and economies.
ANZ is one of the few managers that offers single sector and diversified portfolios within KiwiSaver so investors can pick and chose what they want to invest in. Also their portfolios have an exposure to property. Not every manager holds this asset class in their strategies. ANZ have exposure to both global and Australasian property.
Property as an asset class took a battering around the GFC period but has bounced back strongly. Over the past 7 years the global property exposure has increased in value by over 20%. Some of the excess return will also have come from having a fully hedged exposure too.
One thing we have found interesting when analysing the ANZ funds is the manager's use of property. Over time property has proven to be a good proxy for real asset returns. Real assets as a sector or asset class, is broadly speaking, anything that is inflation linked and includes, infrastructure, commodities, natural resources, precious metals, real estate and timber for example. Rather than invest into what are often illiquid investments, the manager uses their exposure to property to generate better risk adjusted returns for investors. ANZ have not used hedge funds or other alternatives as these alternatives tend to be riskier and less liquid than their property exposures.
The two top performing funds in the sector are both Australasian focused and not surprisingly given the strength of the NZ share and property markets are heavily exposed to NZ. The respective benchmarks are in NZ indices so this also has an influence on where the majority of the money will be allocated.
The portfolios themselves are quite concentrated and have some hefty positions to a handful of stocks. The companies ANZ hold in the Australasian Share portfolio for example are all familiar and if the manager is to add value over the market, we would expect them to be taking some larger positions in the companies they believe have superior upside potential. That is after all what investors are paying them to do.
----------
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 your life stage. You should move only with appropriate advice and for a substantial reason.
Our March 2016 reviews of the Default, Conservative, Moderate, Balanced & Growth funds can be found here, here, here, here & here
14 Comments
This is a really valuable piece of analysis, so grateful thanks for your work. I hope it gets the profile it deserves, as it demonstrates property isn't the only option to invest in in NZ. Why would anyone not be in the sharemarket if they can, when rapid technology change will drive growth and central banks will continue to do what they have to maintain employment? Now I know this sounds a bit like a 1920s scenario, but given we are now 8 years into the gfc, I think it's reasonable to say that central banks - the prime target for quite a few of your correspondents - are doing a pretty good job of keeping the wheels from falling off. The key is adequate stock selection, mainly to avoid loser companies in technology cul de sacs, and for most of us, that means fund manager selection. I am a bit bemused by media fixation on property and doomsday scenarios when this sort of growth is going on.
Property is locked into the kiwi mindset, not saving or investing. There's probably too many people in the a default kiwisaver fund when they're too young to be in a conservative fund, and a fair number with the wrong PIR rate. There will be plenty of people losing out on potential gains from what will be their largest investment prior to buying a house.
Hopefully someone will notice and benefit.
Smartshares (NZX50 ETF) has outperformed all these managed funds over P3Y (15.5%) returns calculated on NTA movement, assuming distributions reinvested on payment date, after tax and management fee.
http://smartshares.co.nz/types-of-funds/smartlarge/fnz
Therefore, you should probably rethink the following claim:
Stock picking (active management) as opposed to index tracking (passive management) is providing the greatest return for investors and has done for some time now.
The old Smartshares product was a relatively poor performer under the KiwiSaver umbrella. I agree of late it has performed well but we are looking at KiwiSaver funds and only those for whom we can get regular pricing .On this basis active management has by far been the best strategy in terms of the majority of active managers in the top 2 or 3 funds consistently but of course we are only looking at a period in time and whether this statement still holds in 10 years is another story.
In the NZ market it doesn't make sense to hold a passive strategy. There are simply stocks you don't want to hold. Normally a passive strategy is more suited for markets that are deep and extremely liquid and where no additional alpha can be generated through inefficiencies.
The 10-year performance of FNZ is the same as the NZX50. It's appreciated 100% since 2009. So why is that a worse performance than active funds? I would say it's probably better than most active funds.
The idea that there are "stocks you don't want to hold" is moot. That's a primary reason why passive funds are attractive.
I would rather pick the stocks I have in my portfolio rather than taking some of the "rubbish" that is on the market. Would be interesting to run some attribution against the top 50 index to see exactly where the returns are coming from...probably only a handful of stocks which is what you would want to own.
I don't think Smartshares, and aggressive funds are a valid comparison. They still have a significant bond and cash component, and as the article highlighted, many pulled back into more conservative settings in response to volatility over the last four months. They may have done as well or better with their shares. The bonds and shares provide a bit of stability - although yields are so low and the outlook for bonds so poor, I wonder whether they are worth it.
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