The research house Morningstar last week released its KiwiSaver Performance survey to September 30, 2011. With the funds now in place for just over four years, the number of contributors and the amount of funds under management, continues to grow.
As at August 31, there were 1,794,060 contributors (net after opt-outs and closures). There has been growth of 30% over the past two years but it is now slowing. It is still a long way ahead of the Treasury's original estimate of 680,000 contributors by 2014, when the scheme commenced.
The Morningstar survey contains results from 16 providers showing that as at September 30, funds under management were $9.55 billion. Not all providers are in this Morningstar survey.
For the contributor there is confusion over the number of providers because many schemes are managed by the same provider. For example, ANZ, National Bank, OnePath and SIL schemes are all managed by the OnePath asset management team. So it is difficult to compare schemes. The Workplace Savings NZ website has a comparison of 27 KiwiSaver funds, but many are managed by the same provider. For example AMP manages the KiwiBank scheme.
It is not surprising that cash and conservative funds have been the better performers over the past four years. The scheme commenced at almost the peak of markets in 2007 and there has been considerable volatility since then.
As readers of these columns well know, four years is quite short in the cycles of investment returns. Over the past four years conservative funds have averaged 4.45% compared to balanced funds' average of 0.64%. Growth funds returns have averaged -1.6% and aggressive funds -2.9% - after fees but before tax.
However, if you look at the record of the OnePath SIL Balanced fund, the long-term annual average return since commencement in 1959 is 10.7% - after fees but before tax. This fund is identical in asset allocation to the parallel KiwiSaver funds from OnePath.
The volatility is no more obvious than in the aggressive funds where the return from Fisher Funds Growth fund has a three-year average of 8.6%, but last year's average was -4.3%.
This is a perfect example of where time in the market, not timing, is important. Any contributor who joined the Fisher fund within the past 18 months would not be happy but those who have been there for three years or more are receiving a very satisfactory return, and so it will continue. All contributors to this Fisher fund will receive a very satisfactory return in the long run.
It is of concern that 37% of persons currently in KiwiSaver have been enrolled in default schemes. These persons need financial advice because in the main the younger persons will be in a fund that does not perform over the longer term.
Tower Financial Advisory Services about a year ago suggested that members should be more "adventurous" in their saving. They used the example of a member on a salary of $30,000 over 30 years would at 2% by both employee and employer receive $112,500 in a conservative fund assuming 2.5% return compared to $252,700 if aggressive enough to receive 7.5% per annum return in a growth or more aggressive fund.
The Government has recently announced a proposed automatic enrolment scheme from 2014. All employed persons will automatically be enrolled in KiwiSaver but you will be able to opt out. At present persons who change or commence new employment are automatically enrolled but there are many who are employed still not in KiwiSaver.
It will be a quasi compulsory move which probably will become compulsory eventually. It will be good as many who become enrolled as at present will not bother to opt out.
There should be no concerns as to where markets are at present because in the long term the volatility will have no effect, especially because of dollar cost averaging.
A major advantage of KiwiSaver is that you cannot withdraw until retirement age. This rule negates any rash decisions. In the words of Warren Buffet "be fearful when others are greedy and be greedy when others are fearful". Volatile markets present opportunities.
• Peter Smith is an authorised financial adviser and a certified financial planner and is the principal of Kepler Group Otago Ltd, Dunedin. Email: pete@keplergroup.co.nz. A disclosure statement is available on request and free of charge.
