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Review of the KiwiSaver Fund Manager Market Dynamics and Allocation of Assets

3.3 Significance of KiwiSaver funds in domestic capital markets

One of the policy outcomes associated with KiwiSaver's development was increased domestic investment in public debt and equity markets. This has indeed been the case as KiwiSaver funds under management have grown and exposure to the domestic capital markets has followed.

3.3.1  KiwiSaver capital gaining significance

The growth of KiwiSaver relative to other managed funds, life insurance and superannuation assets has been stark, as figure 1 in section 3 above illustrates. These funds (with the exception of KiwiSaver) have remained relatively flat in nominal terms over the last 10 years with KiwiSaver boosting this form of financial assets in the national accounts. As figure 2 in section 3 above shows, KiwiSaver funds under management have increased significantly since its inception in 2007 and will continue growing to around $70 billion by 2020.

While KiwiSaver assets are growing, the size of pension funds relative to the size of the economy remains much smaller than OECD peers. In OECD countries for 2013, the average of pension

funds size relative to GDP was 36.6%[20]. In New Zealand, total pension fund assets comprised 19.1% of GDP in 2013. However, this ratio for New Zealand has steadily risen since 2009:

Figure 12: OECD Country Pension Fund Assets Relative to the Size of the Economy 2009-2013
Figure 12: OECD Country Pension Fund Assets Relative to the Size of the Economy 2009-2013.
Source: Pension in Focus 2014, OECD

3.3.2  KiwiSaver capital in New Zealand public markets

As mentioned above, the size of total managed fund assets in New Zealand nearly doubled over the past decade which is mostly attributable to the growth of KiwiSaver. The media, investment management industry and academic commentary in addition to PwC (2008) and MED (2010) support the conclusion that KiwiSaver has supported the New Zealand funds management industry in this early period. This is confirmed by our feedback from KiwiSaver providers in interviews. It is difficult to measure the impact of KiwiSaver on domestic capital markets in real terms as stock prices and composition of shareholder registries are driven by a number of factors. The growth of listed company market capitalisation in New Zealand and any causal effect from KiwiSaver assets under management and investment in New Zealand equity assets cannot be accurately determined.

In the last decade, New Zealand listed companies' total market capitalisation as a percentage of GDP has been around 42% and stabilising at this level in recent years.[21] KiwiSaver total assets under management have been grown at an average rate of 8% year on year and investments in New Zealand public stock market stands at NZ$2.17 billion as of June 2014 or 0.9% of GDP.

We should expect KiwiSaver funds and fund managers to play a bigger role in shaping New Zealand domestic markets over time. This could be via large blocks of shares held by funds with similar (long-term) investment strategies or activist fund manager investors displacing widely dispersed retail investors. Growing significance of KiwiSaver funds could bring along influence on the boards of companies through shareholder advocacy at shareholder meetings and in respect of corporate actions. Accurate data to assess this institutional influence is not available, however, the best proxy we have is the level of ‘institutional’[22] ownership as analysed in Goldman Sachs' Annual NZX Ownership Survey and S&P Capital IQ data shown in table 1 and figure 13, respectively, below. The data illustrates that managed fund holdings of NZX stocks have risen since KiwiSaver began, although the NZX10 data does not show any trends of greater or lesser institutional investment.

Table 1: Goldman Sachs NZX Ownership Survey data

Exhibit 2: Ownership structure of sample NZX primary listings

Source: Goldman Sachs Global Investment Research, RBNZ, IRESS, Marlin Investor Relations

Figure 13: S&P Capital IQ institutional investor ownership NZX10
Figure 13: S&P Capital IQ institutional investor ownership NZX10.
Source: S&P Capital IQ and Treasury analysis

On average, institutional investors own about 40% of NZX10 companies and their holdings have grown somewhat in significance from 2008 to 2014 on average for all NZX10 companies. Especially for those companies that have a concentrated ownership base, we found institutional ownership has grown even more notably over the period. Institutional investors have a prominent presence in newer technology companies TradeMe and Xero. In contrast, institutional ownership in infrastructure and telecommunication companies is less significant. Energy companies are largely owned by non-institutional investors.

3.3.3  KiwiSaver in private capital markets

While the size of total managed fund assets in New Zealand has nearly doubled over the past decade, there has been very limited investment by KiwiSaver funds in private equity, other private investment markets and direct investment in infrastructure. The New Zealand venture capital market has seen negligible investment by KiwiSaver funds, with the NZVCA stating, “the KiwiSaver scheme has yet to contribute to the pool of capital available to private business.”[23] We find that this is due to the risk profile of private investment opportunities, the inherent illiquidity of private equity and VC investment and the legal requirement in the KiwiSaver Act to liquidate and transfer a member’s funds within 35 days. The higher costs and deferred performance fees for managers and limited partners associated with private equity and VC investment is also a factor. We also understand from KiwiSaver fund managers that uniform valuation methods are not used for private equity investments leading to differing unit pricing between funds invested in the same alternative assets. However, with greater scale in KiwiSaver and hence larger pools of liquid assets, there may be further investment in alternative investments and international trends support this.[24]

Notes

  • [20]Simple average of selected 36 OECD countries for 2013. The weighted average of the same sample is 84.2%.
  • [21]According to World Bank’s data, total market capitalization of listed companies in New Zealand is at the low end of the spectrum among developed economies. Norway shares the same status.
  • [22]Capital IQ define institutional investors as investment managers, insurance companies, government pension sponsors, and family offices. KiwiSaver investments cannot be singled out due to limited data.
  • [23]NZVCA (2013).
  • [24]OCED (2014).
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