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5.1 Returns and performance of KiwiSaver funds

KiwiSaver providers' separate funds range from low-risk cash funds to higher-risk aggressive funds. The volatility of returns of asset classes follows orthodox financial theory - funds with greater exposure to growth assets such as equities exhibit greater volatility of returns than funds with exposure to cash and fixed income assets. Figure 31 below displays how returns have differed across these asset classes over time.

Figure 31: Annual percentage return of KiwiSaver funds by asset class, 2010-2014
Figure 31: Annual percentage return of KiwiSaver funds by asset class, 2010-2014.
Source: Morningstar, Fund managers' quarterly statements disclosed to FMA

The investment returns of KiwiSaver in aggregate and the KiwiSaver default funds[62] as of 30 June 2014 are compared to a selection of market indices.

Figure 32: Historical performance - KiwiSaver and selected market indices
Figure 32: Historical performance - KiwiSaver and selected market indices.
Source: Bloomberg, Morningstar and FundSource

KiwiSaver risk return analysis

In the following we review performance of KiwiSaver funds and use surveyed KiwiSaver fund return data to measure KiwiSaver funds’ historical performance and risk profile. We have used one, three and five year past returns in the review. The following table offers an overview of historical return and risk profile of the KiwiSaver funds by sector type (such as defensive, conservative, balanced, growth and aggressive). We examine funds by sectors in order to compare and analyse funds of similar risk return characteristics. Assessing sectors is appropriate as it is consistent with the fund manager’s quarterly disclosure statement classifications, the FundFinder calculator grouping of funds and academic reviews of funds’ performance. We adopt FundSource’s classification of fund type. Returns are after fees:

Table 10: Return and standard deviation[63] by fund Type to 30 June 2014

Table 10: Return and standard deviation by fund Type to 30 June 2014

Note: * Average annualised

Source: FundSource

We aggregate individual funds' returns to sector funds level (weighted average) and compare these against a chosen diversified composite index as a benchmark. As we do not know each individual fund's targeted asset allocation, it is necessary to customise benchmarks that best reflect the underlying funds' risk return profile. Construction of these composite benchmarks is somewhat arbitrary, however, the intention is to follow market convention and to choose from indices which a New Zealand-based investor can have ready access to. For cross comparison, based on the underlying funds’ investment strategies, three generic benchmarks are constructed as below:

The Diversified Defensive Composite Index is constructed using the following indices and weightings: NZX 90 Day Gross - 37.5% ANZ NZGS Gross - 37.5% NZX 50 Gross - 12.5% MSCI World Gross - 12.5%

The Diversified Balanced Composite Index is constructed using the following indices and weightings: NZX 90 Day Gross - 25% ANZ NZGS Gross - 25% NZX 50 Gross - 25% MSCI World Gross - 25%

The Diversified Growth Composite Index is constructed using the following indices and weightings: NZX 90 Day Gross - 12.5% ANZ NZGS Gross - 12.5% NZX 50 Gross - 37.5% MSCI World Gross - 37.5%

When aggregate sector funds' returns after fees are compared against their corresponding benchmarks, value add by fund managers is not evident. Underperformance appears neither be asset class or time period dependent. Only in the case of the default funds' one-year and balanced funds' three-year returns do these funds outperform the chosen benchmarks. Aggressive funds in aggregate have performed most poorly relative to benchmarks.

Table 11: Historic returns of aggregate KiwiSaver sector funds relative to chosen benchmarks

Table 11: Historic returns of aggregate KiwiSaver sector funds relative to chosen benchmarks

This concurs with the findings of Frijns and Tourani-Rad (2013). By using risk-adjusted performance metrics, the authors found there is no evidence of systematic outperformance of KiwiSaver ‘growth' funds, and “in several cases there is evidence of systematic underperformance.”[64]

Turning to single sector funds the performance is more mixed. Single sector funds invest in a single asset class (eg, equities, bonds or cash only). Single sector funds have outperformed the chosen benchmarks in many cases. Fixed interest and cash sector funds have tended to perform poorly relative to benchmarks over the longer timeframes.

Table 12: Aggregate single sector KiwiSaver funds performance relative to chosen benchmarks

Table 12: Aggregate single sector KiwiSaver funds performance relative to chosen benchmarks

Source: FundSource and Treasury calculation

KiwiSaver performance relative to NZSF, ACC and GSF

From a public policy perspective, KiwiSaver is intended to assist individuals in smoothing consumption over their lifetimes by facilitating saving during working life for future consumption. Present day income is deferred to meet future liabilities. At an aggregate level, KiwiSaver has similar characteristics to the New Zealand Superannuation Fund (NZSF), Accident Compensation Corporation (ACC) and the Government Superannuation Fund (GSF) in that Government savings are invested over a long investment horizon to meet future liabilities. Therefore, some comparisons can be drawn between the aggregate performance of KiwiSaver relative to the respective investment portfolios of the NZSF, ACC and GSF.

There are asset allocation differences between the different entities, with stated reference allocations varying. KiwiSaver at an aggregate level is notable in having 56% of capital in income assets and 44% in growth. The Government financial institutions all state that their reference allocation has a majority of capital in growth assets (actual allocation may vary) and this is discussed in more detail below.

We find that over a one, three and five year period, aggregate KiwiSaver funds' performance was mixed in comparison to ACC and GSF, but outstripping both over a five-year horizon. The NZSF has outperformed KiwiSaver over all periods.

Total Returns 1 Year (%) 3 Year (%) 5 year (%)
NZ Superannuation Fund 19.4 15.0 17.0
ACC Investments 6.2 8.2* 10.0
Gov Superannuation Fund 14.3 10.4 11.7
KiwiSaver Overall 9.7 8.0 15.2

*March 2014

Source: NZS, ACC, GSF and FundSource as of June 2014

Notes

  • [62]Default funds are required to have a high proportion of funds invested in bank deposits and fixed interest investments, and a lower proportion invested in growth assets.
  • [63]As a commonly used risk metric, standard deviation is an absolute measure of risk. It measures dispersion around a central tendency (ie. an investment's average expected return within a certain period of time). For KiwiSaver investors though, there is another important risk (ie. uncertainty) being the likelihood of meeting his or her retirement income goal at the time of retirement when KiwiSaver savings are drawn upon.
  • [64]Frijns and Tourani-Rad (2013).
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