Investment Commentary

Are KiwiSaver managers investing members’ funds successfully?

David Van Schaardenburg shares the results of his research study examining investment returns success across the KiwiSaver industry.

BY DAVID VAN SCHAARDENBURG

A year ago I completed a research study, the first of its type, which examined the success across the whole KiwiSaver industry in investment returns terms. The test was: “Are KiwiSaver fund managers achieving returns (pre-tax, after fees) for their KiwiSavers’ fund above the market return benchmarks they set for that fund?”

This test aligns with the most common key fund screening criteria used by investment advisers to select funds for their clients – are fund returns exceeding their return benchmark, after manager fees? In three decades of funds management I have never seen the reason why an adviser would advocate a fund manager where there wasn’t evidence that they could beat their return benchmark.

My return test is applied to all KiwiSaver funds on the same basis whether they are low fee or high fee, active or passive management styles. In doing so it avoids the debate on fee levels and the philosophy behind how KiwiSaver fund managers manage client funds.

Twelve months ago, using FMAsourced data, my test was applied across the entire KiwiSaver fund industry pre-tax, after fees for the year return period to March 31, 2020. The outcomes from this initial assessment were unfortunately pretty underwhelming.

A year on into the pandemic recovery, using the most recent data to March 31, 2021, have KiwiSaver fund managers improved on their delivery of “better than benchmark” investment outcomes to their members?

It’s important KiwiSaver fund managers improve investment outcomes for members

Most of the public debate on KiwiSaver has centred on topics like fee levels, who runs the default funds, how to access low cost advice – yet very little debate has been on investment success displayed by KiwiSaver fund managers.

To date investment excellence has been promoted via relatively simple advertisements of past returns or ranking within a broad KiwiSaver fund group. However, I have yet to see any advertising of KiwiSaver “investment success” – ie our fund returns have beaten the fund’s return benchmark over the last five years by xx%. Easy to know why this hasn’t happened – it’s harder to beat your return benchmark over medium term periods than beating a selection of your peers.

Such analyses become increasingly important as the industry and diversity of options for KiwiSaver investors grow as does the quantum of New Zealand household wealth that is under the management of the KiwiSaver managers.

The growing importance of KiwiSaver can be seen when comparing data at March 31, 2020 to March 31, 2021.

• The number of KiwiSaver funds on offer have grown by near 20% from 255 funds to 305 funds.

• The number of funds with a five year return history has expanded from 163 to 201 funds.

• Annualised fund manager revenues have grown from $540 million to $775 million.

• Dollar-weighted average annual fees have grown from 0.85% to 0.93%.

• KiwiSaver funds under management have grown by 38% from $61 billion to $84 billion.

The latter sum I expect to grow by an average $10 to $15 billion each year over the next five years. So by 2026 the KiwiSaver industry should have around $150 billion under management. Extracting an extra 0.5% of fund performance each year through superior management of that sum would equate to another $750 million in added wealth each year into the accounts of KiwiSaver members. No small beer!

Surprising to me in the above figures was the rise in weighted average fees over the last year, especially given the consumer and regulatory pressure on KiwiSaver managers to reduce their fees. It appears that much of the reason for that increase is the material rise in the proportion of KiwiSaver members investing through growth funds as well as their substantially better accumulated returns from growth funds over the last year versus other fund types.

This is good news for the fund industry as growth fund fees tend to be higher than less risky fund categories.

Comparing March 2020 to March 2021, the proportion invested through KiwiSaver growth and aggressive growth funds of the industry total rose from 32.5% to c.44%.

What has been the KiwiSaver industry’s track record of “investment success”?

When I first completed this study a year ago, March 31 was near the depth of the Covid pandemic-derived sharemarket rout. So no surprise there was a wide range of returns (pre-tax, after fees) for the 240 KiwiSaver funds during the year to March 31, 2020 spanning from +19% to -39% with an unweighted average of -2.4%.

Disappointingly, of the 240 KiwiSaver fund options in the FMA database in the one year to March 2020 (pre-tax, after fees):

• only 75 KiwiSaver funds (or 31%) achieved a better return than their return benchmark (set by their KiwiSaver fund manager)

• only 66 KiwiSaver funds (28%) delivered a higher fund return to their members than the fund fees charged (ie KiwiSaver members made more money in the fund than its KiwiSaver fund manager)

• 89 KiwiSaver funds (37%) had apositive return.

What was more disappointing was the average KiwiSaver fund return was below the average fund performance benchmark (“market index”) return of by 0.7% on average.

Have “investment success” rates improved in the latest 12 months to March 31, 2021?

Coming off a depressed base at March 31, 2020 the returns for most KiwiSaver funds have been materially boosted in absolute terms by the NZ sharemarket rising 29% and global sharemarkets by 31% (NZ dollar terms).

Across the 264 KiwiSaver funds ($80 billion in funds at year end) with at least a 12 month return history pre-tax, after fees:

• the range of returns varied from +107% to -6% with an unweighted average of 22.4%

• the weighted return average was 21.5%

• KiwiSaver member investment returns added up to $18 billion.

This is a huge positive turnaround from the unweighted average KiwiSaver fund returns in 2020 of -2.4% and a collective loss across all KiwiSaver members of $821 million.

However, have the KiwiSaver managers done better than their return benchmarks?

Most fund managers will tell you that it’s hard for fund returns to keep up with a strongly rising market due to cash and expense drags.

So it’s interesting to see that in such a strong return year from sharemarkets, of the 264 KiwiSaver funds:

• 145 KiwiSaver funds (or 55%) achieved a better return than their return benchmark (set by their KiwiSaver fund manager)

• 248 KiwiSaver funds (94%) delivered a higher fund return to their members than the fund fees charged (ie KiwiSaver members made more money in the fund than its KiwiSaver fund manager)

• 260 KiwiSaver funds (98.5%) had a positive return.

Across the industry the average fund versus benchmark performance (pre-tax, after fees) was 0.84% of assets with the collective total outperformance adding up to $1.1 billion (pre-tax) to member accounts. This is very impressive. It was also a win year for active versus passive KiwiSaver fund managers with the former group’s funds tending to consistently beat their return benchmarks after fees while the notable passive (index) managers modestly underperforming their benchmarks typically in line with the level of their fees.

Are KiwiSaver managers “investing successfully”?

Past performance especially over short periods has its limitations as to its relevance for the future.

However when you look at the last 12 months to answer my original question: “Are KiwiSaver managers investing members’ funds successfully?”

Then the answer must be a resounding “YES”.

David van Schaardenburg is an independent investment analyst.