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The NZ Funds KiwiSaver Scheme: a six year retrospective performance analysis Report commissioned by NZ Funds Prepared by David Chaplin*, May 2018

Disclaimer: This study was based on data collected by Investment News NZ (IN NZ) from the annual reports and financial statements of most KiwiSaver schemes over the six annual periods ending March 31, 2017. Annual aggregate scheme performance (which does not take into account underlying fund risk profiles) was measured against a simple average of funds under management for the year in question; overall six-year performance was calculated as a ‘geometric mean’ of the annual return measures. Both metrics are approximations and should not be used to gauge actual returns of individual scheme members. Past performance is no guarantee of future returns. The analysis does not constitute investment advice nor an endorsement of the NZ Funds KiwiSaver Scheme by IN NZ or David Chaplin. * David Chaplin is the founder of Investment News New Zealand. For more information see www.investmentnews.co.nz


Introduction – annualised periods New Zealand Funds Management Limited (NZ Funds) officially launched its KiwiSaver scheme in October 2010, half-way through the financial year. By the end of March 2011 the NZ Funds scheme reported 314 members and just over $1.4 million under management. At the time NZ Funds was competing against more than 40 other schemes in a market ripe for consolidation. As at 31 March 2017, just 29 KiwiSaver schemes were open to new members, including NZ Funds, which had grown to about $166 million and over 7,300 members – making it the 21st largest scheme in a market. The schemes in the market range from the mini 300-member Maritime Retirement Scheme to the mega 562,000-odd ANZ KiwiSaver Scheme. In total, the Financial Markets Authority (FMA) data lists over 240 underlying KiwiSaver funds reflecting a reasonable range of investment choice among the schemes. Generally, KiwiSaver providers lump that investment choice under the standard conservative, balanced and growth banners, which some providers further stratify (‘balanced growth’, for example) or spin out with specific asset class options, such as New Zealand shares. However, the standardised naming system hides a wide disparity of actual risk profiles among the various KiwiSaver funds that may share the same label. For example, the New Zealand share allocation for KiwiSaver growth funds ranges from 1.5% for Kiwi Wealth to 53.4% for Milford Asset Management, according to investment consultant firm, Melville Jessup Weaver. In short, comparing KiwiSaver fund performance on a like-for-like basis is no simple task. The FMA’s recently-introduced ‘KiwiSaver Tracker’ provides a view of fund performance and fees across one and five year periods based on quarterly data supplied by providers. While the FMA tool offers some insight, the regulator itself notes “other sources of KiwiSaver fee and return information may use a different approach, with different results”. In this paper we will examine the gross performance (before fees and tax) of the NZ Funds KiwiSaver Scheme over the six year period ending 31 March 2017 based on annual report data collected by Investment News New Zealand (IN NZ) founder, David Chaplin. A further cut of the data will compare net returns after tax and net fees (which differ from gross fees in cases – including NZ Funds – where underlying manager fees are deducted from performance). The IN NZ gross investment return figures are calculated by comparing the total reported scheme dollar figure return against an average funds under management (FUM) for the annual period: that is, (FUM at the beginning of the financial year + FUM at end of the financial year) / 2. Net returns – annual dollar returns minus (net fees plus PIE tax) – are compared against the same average FUM figure. Clearly, the result does not take into account the risk profile of underlying KiwiSaver funds. However, the findings do reflect the nature of the scheme as a whole (for example, if members are more exposed to growth assets) and compares the aggregate investment experience of schemes over discrete annual periods. This report outlines how the NZ Funds scheme has performed in absolute and relative terms over the six full year periods it has been in operation.

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The NZ Funds KiwiSaver Scheme: a six-year retrospective performance analysis


1 April 2011 - 31 March 2012 Members FUM

2,020 $16.7m

NZ Funds gross return

7.7%

Ranked

2/41

NZ Funds net return

5.7%

Ranked

2/41

NZ Funds marked its first full year of operation with an impressive second-placed performance. Its 7.7% average gross return over the year was bested only by Milford Asset Management, which returned 8.3% by the same measure. On a net of fees and tax basis, NZ Funds remained the second-best performing scheme for the year behind Milford. Interestingly, a number of other schemes changed rankings when measured on gross and net performance. The median scheme returned about 2.9% gross (and 0.9% net) during the year with seven providers falling into negative territory (16 providers after fees and tax), including the -11.7% result (-13.2% net) recorded by the bottom-ranked (and now defunct) Law Retirement Scheme.

1 April 2012 - 31 March 2013 Members

3,071

FUM

$35.1m

NZ Funds gross return

13.6%

Ranked NZ Funds net return Ranked

9/38 11.5% 7/38

In another generally upbeat year for markets and KiwiSaver providers alike, NZ Funds returned a respectable 13.6% gross and 11.5% net, which placed it among the top 10 schemes for the year. However, the period featured a wider range of gross returns compared to the previous year from the 7.4% achieved by the bottom-ranked Mercer (dominated by its default conservative fund) to Milford’s 21.2%. Milford was almost five percentage points clear of second-placed NZX-owned index fund Smartshares KiwiSaver (16.3%). The median scheme returned roughly 11.5% gross and about 9.1% net. After fees and tax the NZ Funds Scheme jumped two places in the performance measure.

The NZ Funds KiwiSaver Scheme: a six-year retrospective performance analysis

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1 April 2013 - 31 March 2014 Members

4,515

FUM

$60.5m

NZ Funds gross return

10.2%

Ranked

7/35

NZ Funds net return

8.1%

Ranked

6/35

NZ Funds again achieved a top quartile performance as one of the eight schemes in this annual period to hit double-digit returns on a gross basis. NZ Funds 10.2% gross return put it on equal terms with the Medical Assurance KiwiSaver (now a restricted scheme but it was previously open to the public). Milford, once more, claimed top spot this year with a return of 19.6% – almost six per cent clear of second-ranked Fisher Funds. Mercer Super Trust, Aon (which invests via other fund managers including Milford and Russell), ANZ, and Kiwi Wealth (the rebranded Gareth Morgan scheme), also achieved gross returns above 10% over the period. NZ Funds again shifted up the performance table on the net performance measure, which also saw Fisher Funds slip to third behind Kiwi Wealth. There was a more than 17% disparity between the top- and bottom-performing schemes on gross measures with the niche start-up BCF (Exclusive Brethren) KiwiSaver returning just 2.1% (primarily due to its almost 100% allocation to cash). The median scheme returned about 7.3% gross and 5.8% net.

1 April 2014 - 31 March 2015 Members

5,781

FUM

$105m

NZ Funds gross return

18.5%

Ranked NZ Funds net return Ranked

1/33 15.6% 1/33

After three years at the top Milford slipped over the 2014/15 financial period to ninth on the IN NZ ladder to be replaced by NZ Funds. The NZ Funds gross return of 18.5% was almost two percentage points clear of second-placed Kiwi Wealth (16.6%). On a net return basis, NZ Funds retained top spot, albeit with the margin between Kiwi Wealth narrowing to about 1%. However, schemes’ gross returns were squeezed across a narrower, 12 per cent range over the period. Excluding the still cash-heavy BCF (4.3%), the gap between the lowest-returning scheme (SBS Lifestages’ 8%) and NZ Funds was 10.5%. A number of schemes also swapped positions on the gross and net return measure. Other than BCF, Lifestages and Mercer, all schemes returned above 10% gross (and 20 recorded double-digit net returns) in a bumper year for members. The median scheme returned 12.3% gross and just over 11% net.

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The NZ Funds KiwiSaver Scheme: a six-year retrospective performance analysis


1 April 2015 - 31 March 2016 Members

6,857

FUM

$130m

NZ Funds gross return

-5.4%

Ranked

30/30

NZ Funds net return

-6.8%

Ranked

30/30

The 2015/16 reporting year saw a reversal of fortune for NZ Funds as it dropped from top to bottom on the KiwiSaver scheme performance rankings. NZ Funds -5.4% gross result (-6.8% net) was by far the worst in a year that saw two other schemes fall into the red: the recently-launched shariah-compliant Amanah KiwiSaver (-2.2%); and, Kiwi Wealth – down 1.1% on a gross measure. Returns across the board, though, were subdued over the year with the top-performer, IwiInvestor, achieving just 9.1% gross. However, the IwiInvestor result was something of a statistical anomaly given it reported only 237 members and $2 million at the time: the provider closed its scheme during the year. Furthermore, on a net basis IwiInvestor dropped to third in the performance charts behind Milford (8.3%, 6.5% net) and Forsyth Barr (8.2% gross, 7.4% net). The gross return range across all schemes spread over 14% but, excluding the negative results and IwiInvestor, scheme performance was tightly bunched during the year. By that measure just six percentage points separated the lowest positive gross return (AMP with 2.3%) and Milford’s 8.3%. The median scheme was up 4.9% for the year on a gross basis and 3.3% net.

1 April 2016 - 31 March 2017 Members

7,326

FUM

$166m

NZ Funds gross return

9.5%

Ranked

3/29

NZ Funds net return

7.8%

Ranked

4/29

In another topsy-turvy year, NZ Funds returned to the upper end of the scheme performance table over the 12 months to 31 March 2017. NZ Funds was up 9.5% gross for the year, edged out for second place by Fisher Funds on 9.7% while the best-performing Medical Assurance KiwiSaver hit 11%. On a net basis, NZ Funds dropped slightly in the rankings behind Milford, which was just 0.05% ahead on that metric. All schemes were in the black during the period that saw Amanah record the lowest gross return of 2%. Excluding Amanah and the tiny BCF (still loaded up on cash) the range between the bottom-performer – ANZ Default’s 4.8% – and the Medical result was 6.2% as measured by gross returns. The median scheme returned approximately 7.5% gross and 6.4% net.

The NZ Funds KiwiSaver Scheme: a six-year retrospective performance analysis

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Conclusion – annualised periods The six year period covered by this study should be viewed against a back-drop of mostly bullish (or at the least, benign) investment markets. With the exception of just 10 schemes (spread across two annual periods), all KiwiSaver ships have floated upwards during that time – at least by gross return standards. Nonetheless, based on the IN NZ figures, scheme performance has varied across a wide range – albeit one that appears to have narrowed of late. For all but one of the six reporting periods in question, NZ Funds KiwiSaver Scheme has ranked in the top quartile as measured by gross and net investment performance measures – claiming a gold, silver and bronze podium spot in different years along the way. Admittedly, NZ Funds spoiled its record in the 2015/16 year earning the wooden spoon with a -5.4% (-6.8% after fees and tax) result – one of three schemes to fall into the red over that period. In general, though, NZ Funds can claim – to date – to be a consistently performing KiwiSaver scheme at the upper end of the scale. As discussed previously, the figures used for this study measure investment performance on a per scheme basis: they take no account of underlying risk profile of different schemes and account for cash-flow simply by comparing reported returns against an average FUM over the period. Given the aggregated nature of the IN NZ return figures, it is not possible to compare them with standard risk or market benchmarks. Importantly, on a gross measure NZ Funds is one of the more expensive KiwiSaver providers – averaging about 1.5% in the first three years when some costs were subsidised. The IN NZ figures show NZ Funds Scheme cost about 3.6% of average FUM during the 2014/15 period: over the subsequent two periods scheme total costs per FUM fell to 2.3% and 1.8%, respectively. By another measure preferred by the FMA KiwiSaver Tracker – fees and costs as a proportion of investment return – NZ Funds has varied across the years. While not covered in this report, a brief analysis of the IN NZ numbers shows NZ Funds has ranked high (but not top) by this measure recently but low in earlier periods. Despite that, on a net basis this analysis shows NZ Funds has retained its top quartile finish in all years (bar the last-place effort in the 2015/16 reporting period): indeed, in two of those years NZ Funds even improved its performance ranking after fees and tax. Since its first full year of operation in the 2011/12 financial year, the NZ Funds KiwiSaver Scheme has typically achieved gross and net investment returns in the top quartile based on the IN NZ analysis.

Analysis of six year period ending 31 March 2017 In the above analysis of KiwiSaver scheme returns on both a gross and net (after fees and tax) basis over the six financial years ending 31 March 2017, we found NZ Funds achieved top quartile results in all but one period (2015/16). As discussed previously, the analysis was based on figures sourced by Investment News New Zealand editor, David Chaplin, from the annual reports and financial statements of all schemes in operation during that time frame. In an effort to further understand how KiwiSaver investment returns varied over the long term we also compare the aggregate performance of all providers that reported in each of the six years of the sample period. After filtering out those that either closed during the six year stretch or launched after the starting point for this study (2011/12), 24 providers remain in the pool. During the period several providers changed names while some merged or were acquired: in this analysis we refer to the most recent scheme name. For the previous year-by-year figures, gross and net performance was calculated by comparing scheme reported returns against a simple average of funds under management for the 12 months in question.

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The NZ Funds KiwiSaver Scheme: a six-year retrospective performance analysis


The method adjusted performance for cash-flows over the year. However, to compare schemes over the six year period we use a different methodology: the geometric mean. In effect, the geometric mean provides a time-weighted measure of performance while the original KiwiSaver annual returns analysis takes a money-weighted approach. To compare total returns of each of the 24 providers over the six year period we have calculated the geometric mean using the previous gross and net annual performance figures as inputs.

1 April 2011 - 31 March 2017 Members

7,326

FUM

$166m

NZ Funds gross return

8.8%

Ranked

7/24

NZ Funds net return

6.7%

Ranked

6/24

Based on this measure, the NZ Funds KiwiSaver Scheme achieved a gross annualised return of 8.8% over the entire six years ending 31 March 2017: ranking seventh out of the 24 providers in the study, or in the top third. On a net basis NZ Funds climbed to sixth place by this performance measure with an annualised return of about 6.7%, placing it in the top quartile. Overall, gross returns ranged from 2.6% for the tiny Exclusive Brethren-run BCF to Milford’s 13.3% – or, 0.1% and 11.8%, respectively, after fees and tax. The median provider in this analysis returned 7.4% gross and 5.9% net per year. The findings offer only a broad perspective on providers’ investment performance over the six years to the end of March 2017. Importantly, the return measures are not risk-adjusted. But the results do provide some insight on the character of each scheme. For example, in a period where growth assets have outperformed – as has been the case over the six years in this analysis – those schemes weighted to conservative members should appear near the bottom of these performance rankings. Indeed, both the ANZ Default and Mercer schemes – both almost purely composed of default members and legally restricted to a conservative asset allocation – do sit low down the performance tables in this study. Providers with a more growth-oriented profile – such as Milford – have likewise generated higher returns over the period under study.

Conclusion – six year period About half of the NZ Funds KiwiSaver Scheme is invested in the Growth Strategy, just under 40% in the more restrained Inflation Strategy, and the remaining 10% or so in the conservative Income Strategy. NZ Funds’ place, among the 24 KiwiSaver schemes with a six year track record in this study, in the top third of KiwiSaver providers by gross and the top quartile by net performance likely fits with the underlying investment characteristics. The period in question has featured good returns across most asset classes against a backdrop of muted volatility. However, given the, possibly overdue, return of volatility early in 2018, investment strategies predicated on continuing benign conditions may be tested. Whether increased volatility leads to greater dispersion among KiwiSaver providers over time, remains to be seen. David Chaplin May 2018

The NZ Funds KiwiSaver Scheme: a six-year retrospective performance analysis

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The NZ Funds KiwiSaver Scheme: a six year retrospective performance analysis.  

NZ Funds KiwiSaver Scheme has ranked in the top quartile as measured by gross and net investment performance measures – claiming a gold, sil...

The NZ Funds KiwiSaver Scheme: a six year retrospective performance analysis.  

NZ Funds KiwiSaver Scheme has ranked in the top quartile as measured by gross and net investment performance measures – claiming a gold, sil...