Our comprehensive review of Balanced KiwiSaver fund returns to September 30, 2016, identifying who has the best long-term returns

By Craig Simpson

Another reshuffle in the leaderboard this quarter has seen AMP's Nikko AM Balanced Fund retake the top position. Aon, which also uses the Nikko AM Balanced Fund for one of its KiwiSaver options, advanced up the table too. 

Investing in the Nikko AM Balanced Fund is proving to be the difference in this quarter's results. Both AMP and Aon's funds that invested with Nikko AM are showing returns over 9% for the three year period based on our regular return calculations.

For those who are unaware of Nikko Asset Management (Nikko AM), it's one of Asia's premier asset managers and one of the largest fund managers in the NZ market. As at June 2016, Nikko AM has approximately US$165 billion under management globally. 

In terms of returns since inception, Milford Balanced Fund is the best performer based on our data and calculations. However, this fund has not been running for the full period of our analysis so it is difficult to make a true comparison to those funds that have experienced the global financial crisis. Nonetheless, Milford has a substantial track record with its Growth Fund (in the Aggressive KiwiSaver category) which would give investors some confidence about Milford's ability to add value.

Within Balanced Funds as we have written before, there is a wide dispersion in the underlying asset allocation mix, hedging policies and investment approaches within this category. Because of the different approaches we are seeing quite a bit of movement up and down our performance table as different strategies or positioning within the funds come to fruition or go out of favour.

What hasn't changed however is the fact that the top three or four places are continually dominated by the same funds. This is encouraging from the perspective of delivering some consistency in long run returns to investors and in general there is very little separating the various managers at any point in time from our experience.

On a regular saving basis over the period from April 2008 to September 2016 the gap between the top and bottom Balanced fund is now 2.4%, this is slightly greater than last quarter's gap of 2.2%.

The average annual return of the top 5 Balanced funds to the top 5 Default funds the differential is now 2.4% (previously 2.05%). In the more conservative sectors, we have seen some return compression as bond yields have been rising, however, in this category we are seeing a widening of the gap between the Balanced Funds and Default Funds.

Whether the additional 2.4% return received over the long term justifies the step up in volatility compared to the Default Funds is open for debate. The return premium is attractive but investors need to understand the risks and uncertainty around capital values are greater.

Here is the comparison as at September 2016 for Balanced Funds:

Balanced 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 September 2016					$	% p.a.	$
AMP Nikko AM Balanced	B	G	G	28,805	16,049	8.8%	44,854	9.2%
Aon Russell LifePoints 2025	B	B	B	28,805	15,226	8.4%	44,031	8.8%
Aon Russell LifePoints Moderate	B	B	M	28,805	14,973	8.3%	43,777	8.7%
Aon Nikko AM Balanced	B	G	G	28,805	14,939	8.3%	43,744	9.4%
ANZ OneAnswer Balanced	B	B	B	28,805	14,758	8.2%	43,563	7.3%
ANZ Balanced	B	B	B	28,805	14,553	8.1%	43,358	7.2%
Mercer Balanced	B	B	B	28,805	14,524	8.1%	43,329	8.1%
AMP Fisher Funds Two Balanced	B	B	B	28,805	13,833	7.8%	42,638	7.0%
ANZ Default Balanced	B	B	B	28,805	13,819	7.8%	42,623	7.4%
ASB Moderate	B	B	M	28,805	13,456	7.6%	42,261	7.8%
Fisher Funds Two Balanced	B	B	B	28,805	12,894	7.3%	41,699	6.4%
Kiwi Wealth Balanced Fund	B	B	B	28,805	11,750	6.7%	40,555	5.7%
Booster Balanced	B	B	B	28,805	11,276	6.5%	40,080	6.9%
AMP Moderate Balanced	B	B	B	28,805	11,184	6.4%	39,989	5.6%
Milford Balanced	B	B	B	21,926	11,785	10.7%	33,711	10.2%
BNZ Balanced	B	B	B	12,083	3,090	7.5%	15,173	6.1%

Our September reviews of the Default, Conservative, and Moderate funds can be found here, here, and here.

Observations and factors driving performance

The commentary above has highlighted one of the main differences in the performance for some of the funds has been investing in the Nikko AM Balanced Fund. A majority of the underlying strategies of the Nikko AM Balanced Fund have historically been tracking well ahead of their respective market benchmarks and the cumulative effect of this is flowing through to better performance for those funds who use this manager in their scheme.

Asset allocation and hedging preferences continue to play a big part in the returns. Funds that have been fully or substantially hedged will have picked up a premium as the NZ dollar has risen against many of our trading partners.

Schemes with a preference for global bonds over domestic alternatives are delivering superior underlying performance before tax and fees are deducted.

Those with a greater exposure to NZ shares continue to reward investors although the last month has seen the NZX50 retreat slightly. The twelve-month return to 30 September of between 31% and 37% depending on which index you want to reference, is staggering, especially when the MSCI World Index including dividends and full hedging returned just 13.5%. The same index that is 50% hedged returned a paltry 5.4% over the same period.

Mercer's Balanced Fund has continued to benefit from exposures to Property and alternative investments. Mercer along with AMP & Aon (via Nikko AM) are among a handful of schemes with exposure to alternative assets and strategies. Having a broad exposure to a number of asset classes and strategies will provide greater diversification and should over time reduce risk if managed correctly.  

Funds that have been more defensively positioned such as the ANZ OneAnswer Balanced Fund which is overweight Cash and underweight every other sector, except Property which is in line with the target allocation, have seen their performance drift lower. This specific fund was one of the big losers based on our regular return model. ANZ's hedging position will also be a contributor to the funds performance.

If we were investors in this fund we would not be too concerned by the drop in performance as this move to Cash is part of a deliberate de-risking strategy which started some time back. What this means is that ANZ's portfolio managers, investment analysts and strategists are preparing for some rougher times ahead and taking precautionary steps in advance to preserve investor capital. There is always a risk that things don't play out as expected and that the returns may lag competitors for a period. With increased volatility of late and some concerns around the upcoming US elections we would be comfortable sacrificing some additional returns for capital security.

Kiwi Wealth's performance in this category is being impaired by the lack of domestic bond and equity exposure which is a deliberate investment decision. Markets move in cycles and we would expect Kiwi Wealth's returns to pick up again when domestic markets take a back seat to global alternatives.

The Milford and BNZ Balanced funds have not been going for the full period and hence they appear at the bottom of the table which is ranked firstly on the value of total contributions and then performance. These two funds should not be considered as part of the bottom quarter of performers and you need to assess these funds on their own merits.

----------

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.