NEW ARTICLE: Default Switch May Have Pushed More Kiwisaver Members To Riskier Funds
A move to change the settings of default funds may have skewed their returns lower, and pushed more KiwiSaver members to take risk, one commentator says.
In recent times, more KiwiSaver money has gone into riskier funds.
About half of all KiwiSaver FUM is now in growth and aggressive funds, compared to a third a decade ago.
Even within categories, funds are adding more growth assets.
Peter Urbani, chief executive at KnowRisk Consulting, said people were often looking at returns tables and noticing that balanced funds had been steadily underperforming growth counterparts.
Some of that had been because international share markets had been performing very well and pushing up the returns of riskier funds, even though New Zealand markets had lagged.
But he said part of it was because default funds had shifted from conservative settings to balanced settings.
“The transition period took so long that many funds sat in higher than normal levels of cash over that period for liquidity reasons but that imposed an effective performance drag of at least 1 percent to 1.5 percent in lower returns over the period.
“Instead of seeing 6 percents and 7 percents in the balanced category, people were getting five and six, with the odd seven from Milford. Naturally they migrated up into riskier funds, the growth funds…It’s perfectly rational for people to do that. But obviously they’re not always aware that they’re taking more risk at the time.”
He said higher levels of risk were not a problem for people starting out because they would have time to ride out any market falls. “The earlier you start saving the better off you are because the lower the required rate of return to hit the same target.
” But those closer to retirement had to be more cautious because it could affect their lifestyle going forward. He said ACT’s policy of removing tax on KiwiSaver returns would help reduce the performance chasing pressure that could prompt funds to push their allocation to growth assets.
“They are untaxed in South Africa and several other places. You do get taxed but you get taxed at the end, you don’t get taxed during the lifetime. The multiplier effect is you end up with potentially three times more money”
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BEHIND THE ARTICLE
Aurellan Asset Management's View
Over the past decade, KiwiSaver investors have taken on a lot more risk, and most of it has landed in one place.- 55% of KiwiSaver money now sits in growth and aggressive funds, up from 30% a decade ago. - Growth assets within each fund type have crept up too (aggressive funds: 85% → 95%).- Almost all of that added risk has gone into global shares, an asset class that is itself more concentrated than it has been in decades.Taken together, these trends leave KiwiSaver members more exposed to the next sharemarket shock. Australian super funds, and closer to home the NZ Super Fund and the Government Superannuation Fund (managed by Annuitas), use a much wider range of diversifiers. KiwiSaver can learn from them. Global shares have done exceptionally well, and no one is disputing that. But "just buy the S&P 500 and set and forget", the topic du jour among finfluencers, overlooks some key risks.
What I actually said / posted regarding this on LinkedIn:
That is indeed an important observation and your analysis is spot on Chris. The reason is of course that Kiwis have been looking at the return tables and noticing that Balanced funds have been returning 5% to 6:% (partly because of the under-performance of NZ Equities post COVID) and are understandably waiting to earn a bit more like 7% to 8% which Growth funds can but don't always deliver. The don't always part is the increased risk/uncertainty you speak of. A second more subtle point I noticed is that the original Default funds were very conservative so the FMA asked people to redesign them to be more Balanced. That was a sensible and good thing but there was one unintended consequence.The transition period took so long (over two years) that many funds sat in higher than normal (5%) levels of cash (up to 14%) over that period for liquidity reasons but that imposed an effective performance drag of at least -1% to -1.5% in lower returns over the period. Partly visible in here https://www.knowrisk.co.nz/post/why-portfolio-construction-matters The new election promise of making KiwiSaver untaxed would go a long way towards reducing the performance chasing pressure but may not happen.
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