By Frank Newman on 4th February 2016
Investment commentator and principal of Milford Asset Management, Brian Gaynor, made some good points recently by comparing the frequency with which householders switch electricity suppliers against the frequency with which they change KiwiSaver providers.
While there is an element of self-interest in his comparison (because he manages KiwiSaver funds which have performed relatively well) the point is worth stating.
He says, “Recently released figures show that 418,209 electricity customers, representing 20.3 per cent of the total market, switched providers in the 2015 calendar year compared with only 157,809 KiwiSaver transfers in the June 2015 year. The latter figure represents just 6.2 per cent of total KiwiSaver members.”
The punch line is this, “…the $6.9 billion allocated to nine default funds returned an average 4.8 per cent in 2015, compared with an average of 9.2 per cent for the five top-performing balanced funds. In theory, default fund investors would have been approximately $300 million better off at the end of the year if they had transferred to these balanced funds. That $300 million is a substantially higher figure than the gains from electricity transfers.”
Although the default providers are “conservative” funds and should have less risk than the five top-performing “balanced” funds, the comparison does highlight the need for those in default schemes to consider the type of fund they should be in.
There are basically five types of KiwiSaver schemes.
Defensive funds. This is the lowest risk option. They invest mainly in cash and fixed interest. The emphasis is on income, not growth (and risk). When expressed in terms of a roller coaster ride, this one is as flat as roller coaster rides go, and likely to appeal to those approaching Gold Card holder status. It will be of little appeal to fearless, fun-seeking teenagers.
Conservative funds are the second low-risk option. Usually between 65% and 90% of their funds are in cash and fixed interest with the balance in growth assets like shares and property. It’s still a pretty uneventful ride.
Balanced funds are the medium risk option. Their investments are split more or less evenly between shares and property and lower risk investments including bank deposits and fixed investments. It’s not bad as far as roller coasters go.
Growth funds usually have between 63% and 90% of their assets in property and shares. It’s a medium to high risk option.
Aggressive funds have the highest risk. About 90% of their assets are in shares and property. In other words, it’s the Kingda Ka of roller coasters with the tallest peaks and longest drops. Ahhhhh! Not one for those who suffer motion sickness.
The fund type that is best for you will depend on many things, apart from ones propensity to motion sickness. The primary driver should be your investment time frame, which really comes down to when the funds will be withdrawn, which for most will be at age 65.
The life-cycle of retirement investing is to start in aggressive funds and progressively reduce the risk the closer one gets to withdrawing the funds. For example, those who are less than five years away from retirement should be investing in a low risk fund, while those +15 years out should be in a growth or aggressive fund.
There are some exceptions to this because in some cases funds can be withdrawn early, to buy a first home for example.
What is clear is that there are a lot of KiwiSavers sitting in a conservative fund, when they should be in either a balanced, growth, or aggressive fund. The fact that they are not thrill-seeking enough will cost them a lot of money when it comes to the getting off the ride.
The decision about which fund to switch to is a little more complex than switching electricity suppliers, which may be one reason why people are less inclined to do so. However, one site that will assist greatly is fundfinder.sorted.org.nz. It is a very good site that has gathered the performance data provided by KiwiSaver fund managers and arranged it in a way that can be manipulated to provide useful information. I recommend KiwiSavers in a default fund take a look at the site and consider which type of fund best suits them so they can enjoy the ride.