INVESTMENT COMMENTARY

Is KiwiSaver proving to be an ‘investment success’ for members?

As most KiwiSaver investors are receiving their annual member statements David van Schaardenburg looks at how accurate a measure of success they are.

Over the past few weeks, just over three million New Zealanders or 60% of the total population, will have received their annual member statement from their KiwiSaver provider.

While annual member statements are a useful summary for KiwiSaver investors to monitor their savings progress over the last year against their current KiwiSaver strategy, these statements may not prove to be such a useful tool when assessing the investment performance of your current KiwiSaver manager.

Due to the significant volatility in financial markets in Q1 2020, generally KiwiSaver funds delivered negative annual returns to most investors for the first time in over a decade. However, we can see from the following data that KiwiSaver is proving a success in terms of the build-up in household savings and in the growth of New Zealand’s fund industry revenues.

KiwiSaver FUM has grown at an annual compound rate just above 17% over the past five years, even after considering the recent decline in asset values in Q1 20201 .

Gross contributions to KiwiSaver funds in the year to March 2020 added up to an estimated $7.7 billion ($7.2 billion via IRD), which is 48% higher than five years ago2 . At March 31, 2020, KiwiSaver assets make up 32% of New Zealand fund industry FUM, which comprises 52% of the industry’s FUM growth since KiwiSaver started in mid-20073 .

Growth in KiwiSaver FUM has seen related income to suppliers growing from $250 million in 20154 to an estimated $540 million ($490 million in year to March 2019) in the latest financial year5 .

As a percentage of year-end assets, supplier revenues from KiwiSaver over the past five years have modestly declined from 0.88% of FUM6 to an estimated 0.85%.

Even though many individual KiwiSaver accounts sizes are still small, growth in KiwiSaver funds under management (FUM) has been very important to the prosperity of the New Zealand funds management industry. KiwiSaver member statements relate to $63 billion in household savings as of March 2020, which is up 10% from $57 billion in the prior year7 .

While the increase in wealth invested through KiwiSaver is good for the New Zealand funds management industry, I want to explore if KiwiSaver is working out as an “investment success story” for its current three million members.

KiwiSaver fund performance over 12 months

For my assessment, I’ve used the most recent returns as reported to the FMA by KiwiSaver fund managers in their March 2020 quarterly fund updates8 .

The FMA KiwiSaver database contains 240 funds that have a performance history over 12 months. The range of returns (after fees before tax) for the 240 funds over the year to March 2020 has ranged from +19% to -39% with an unweighted average of -2.4%.

Of the 240 fund options in the FMA database, in the year to March 2020:

75 KiwiSaver funds (31%) after fund manager fees, before tax achieved a better return than their return benchmark (set by the KiwiSaver fund manager) 66 KiwiSaver funds (28%) delivered a higher fund return after fees, before tax to their members than the fund fees charged (ie KiwiSaver members made more money in the fund than its KiwiSaver fund manager) 89 KiwiSaver funds (37%) had a positive return (after fees, before tax)

It’s no surprise after the slump in sharemarkets in Q1 2020, that the

“It’s no surprise after the slump in sharemarkets in Q1 2020, that the KiwiSaver funds industry delivered a negative average fund return after fees, before tax of -2.4% in the year to March 2020.”

“From my analysis, it appears only a minority of KiwiSaver managers have been delivering ‘investment success’ to their members.”

KiwiSaver funds industry delivered a negative average fund return after fees, before tax of -2.4% in the year to March 2020. What was more disappointing was the average KiwiSaver fund return was below the average fund performance benchmark (market index) return of -1.7% by 0.7% on average.

Most KiwiSaver fund managers follow an active management approach to their KiwiSaver funds. In principle, the aim of an actively managed KiwiSaver fund is to beat the fund’s return benchmark after their fees. With 69% of funds not achieving that hurdle in the most recent financial year, I draw two interim conclusions.

01

02

Most active KiwiSaver fund managers have fund costs that exceed their ability to “beat the market”.

A good number of KiwiSaver fund managers might do better for their members by reducing their fund charges and being less active and more index oriented.

1 RBNZ https://www.rbnz.govt.nz/ 2 RBNZ https://www.rbnz.govt.nz/ 3 IRD https://www.ird.govt.nz/ If we look at the five largest KiwiSaver providers by FUM, including the big four banks, the underperformance trend is further accentuated. In the year to March 2020, 89% of their KiwiSaver fund offerings had after fees before tax returns below their own benchmark hurdles.

But maybe my underperformance concerns are overstated as a 12-month period may not be indicative of KiwiSaver fund performances versus benchmark over the longer term.

Longer term performance of KiwiSaver funds

To get a sense of the longer-term performance trends in the KiwiSaver industry, I’ve analysed the five-year performance trends of KiwiSaver funds. I have focused on the “growth” KiwiSaver funds offered by 14 of the larger KiwiSaver providers. As of March 2020, these funds collectively have FUM of $12.4 billion (20% of total KiwiSaver FUM).

Per annum, this fund group had average returns after fees before tax of 5.3%, which varied from a high of 7.3% to a low of 0.6%. Their benchmark average return was 6.3%, which represents an average underperformance of 1% per annum on fund returns versus their return benchmark.

Excluding one significant underperformer, this differential drops to 0.7% per annum. However, only three of the funds, which manage 27% of sector FUM, outperformed their benchmarks over the most recent five-year period. Pretty disappointing.

Summary

KiwiSaver annual member statements are a useful summary of your savings progress but do not necessarily prove

4 FMA https://www.fma.govt.nz/ 5 FMA https://www.fma.govt.nz/ 6 IRD https://www.ird.govt.nz/ to be useful when assessing the “investment success” of your current KiwiSaver manager, which can vary widely.

In my opinion, the best publicly available reports to assess investment performance are the quarterly fund updates which each KiwiSaver manager is required to compile and publish on their website.

From my analysis, it appears only a minority of KiwiSaver managers have been delivering “investment success” to their members. Given the rising wealth invested through KiwiSaver funds, it is important KiwiSaver managers are made more accountable for fund performance as well as providing their members with lower cost, possibly less active, investment options.

Even better, given the increasingly important role KiwiSaver is having in building their household wealth, KiwiSaver members should move on from a DIY approach to use an independent Authorised Financial Adviser to recheck the “investment success”, or not, of their current KiwiSaver solution.

If you have any further questions relating to this article or KiwiSaver contact the Findex advice team at findex.co.nz A

David van Schaardenburg is a Senior Partner, Wealth Management at Findex. An Adviser Disclosure Statement is available on request and free of charge. www.goodreturns.co.nz/disclaimers

7 IRD https://www.ird.govt.nz/ 8 FMA KiwiSaver database of reports released mid-May for the period up to March 31, 2020