Our comprehensive review of KiwiSaver growth funds to September 2017, identifying who has the best long-term returns

By David Chaston

This is our third review of the long term performance of various types of KiwiSaver funds to September 2017. The first one reviewed default funds, the second one moderate funds, and this one focuses on growth funds.

Overall, we cover three categories of growth funds; balanced growth, growth, and aggressive funds.

For balanced growth type funds there is more volatility in returns as they traditionally have higher exposures to equities or property than for moderate, default or conservative funds. These types of funds include bonds with a lower credit rating which gives them a higher risk profile. Although the losses in capital may be experienced more frequently, over the long run your capital value should grow more quickly than the more conservative types.

For growth and aggressive funds larger amounts of the capital are exposed to equity markets and investors should expect to see larger volatility in their returns from month to month and year on year. But in the longer run, these funds should deliver the best returns. That's the theory at least - and you should check to see that over the longer term managers are rewarding you for the extra risk you are exposing yourself to. A track record is one way to verify that (although track records are not always indicative of future outcomes).

Growth funds shy away from the more speculative choices you can make in an aggressive mandate. Growth funds will have a higher exposure to 'alternative assets' than most other categories, but not as high as aggressive funds.

'Alternative assets' are investments in business ventures that may not have the usual liquid markets to trade them, or investments usually only suitable for very experienced investors. Alternative investments include private equity, hedge funds, managed futures, real estate, commodities and derivatives contracts. And they might include property assets via syndications, for example, or pre-IPO venture capital equity.

Aggressive funds will have a higher exposure to alternative assets than growth funds, who will lean to more property-type choices.

Growth funds are high-risk, high-reward options, but not the highest risk. They will deliver volatile returns, but over time, especially longer time frames suitable for KiwiSaver, they should greatly outperform, generating a compounding return far ahead of inflation.

But do they?

That is what this review is trying to assess, and who has the better track record in this space.

Here are the results:

What is noticeable is that none of these funds has managed an average of +10% pa over the nine years of KiwiSaver in this review.

In fact some have barely done better than the top moderate funds.

The stand-out fund in this category is Aon Russell LifePoints Growth Fund. Not only does it top the rankings in this category since inception, it is showing an improved return in the past three years.

Frankly, given the state of the investment markets, most of these funds should be showing better last-three-year returns than for the full nine years since inception. A couple of others do, but not to the level of the Aon Russell LifePoints Fund.

One reason these results may look a little lower than you would expect - and a reason why our analysis will show a lower result than what the funds themselves publish - is that we judge them on an after-tax, after-all-fees basis. And fees for these types of funds will be higher here than for the more conservative options. That is because these funds all require a much more active, hands-on style of management. Sifting out the investment choices that may not pay off as originally intended is skilled work, requiring as much skill as choosing likely future winners. The fee load plays a more important role in our assessments here.

And don't forget the impact of the hedge-unhedged strategic decisions, important because many of the investment choices will involve offshore elements.

Here is where these funds are invested. Fixed income elements will be bonds with less than top credit ratings (although most will still be 'investment grade'). Equity investments are the bulk of these portfolios, although there will be more capital-gain plays than dividend-yield plays. And property funds and alternative assets get a reasonable allocation here too.

At this end of the risk spectrum, historical track record is a little less important than understanding the strategy for the future. But that is hard for an individual fund participant and requires dedicated work and a background to understand what the manager is really trying to achieve. To a large extent, you are trusting the manager, and that is where the historical track record is usually fallen back on. That is an understandable reaction by fund investors even if it can't be rigorously justified.

The more risk you want to take on to get access to superior returns, the more work and knowledge you need to have to choose the right growth fund. If you don't have that sort of background, at least engage an experienced, qualified adviser you trust.

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For explanations about how we calculate our 'regular savings returns' and how we classify funds, see here and here.

Across the industry there is currently no consistency on how funds are categorised. We have found that sometimes the fund name can be misleading and it is important to completely understand what drives the funds performance (asset allocation, investment philosophy etc) and be aware of how the underlying portfolio of securities is made up and where the potential variability in monthly or annual returns may come from.

To learn more about how we categorise the various funds click 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.