This article was published on 29 February 2020. Some information may be out of date.

QYou regularly suggest that readers choose a low-fee KiwiSaver provider/fund. In last Saturday’s column you state, “Are you in one of the lowest-fee funds of your type? This is the best way to choose a KiwiSaver provider”.

Personally I believe this is too much of a generalisation and could be quite misleading on the basis that not all or even most low-fee KiwiSaver providers are going to necessarily deliver the best result for KiwiSaver members.

In my own humble opinion, I prefer to research the various providers and funds and compare the returns after fees and before tax. It doesn’t matter which tax rate you are on, the main point being the return after fees.

I joined KiwiSaver when it was first launched and have remained with the same provider, who charges high fees. However, I continue to enjoy the benefits of their hard work by receiving a higher net return (after fees) than the lower-fee providers. I prefer to receive 9 per cent a year after paying 2 per cent in fees than receiving 6 per cent after paying only 1 per cent in fees.

Yes I continue to keep a close eye on the differences between low-fee and higher-fee providers. It’s a very similar debate in terms of active vs passive management and the associated fees.

AYes, last week’s second Q&A was full of generalisations. It included a list of financial questions for the young, and if I had gone into detail on each question it would have filled the whole column.

But many times in this column I’ve explained why I think fees are the best way to choose a KiwiSaver fund, and I’ll do that again now.

Firstly, we’ll assume that you’re in the right type of fund for you — which is the most important decision of all. See the KiwiSaver Fund Finder on to check this.

Next you want to find the best provider of that type of fund. And you’re absolutely right that the only thing that really matters is returns after fees. If we could just predict who will give us the highest after-fee returns in future, it would all be simple. If only.

The trouble is that high performers often don’t stay high performers. In fact, there’s some tendency for the ones that do really well in one period to do really badly in another. They might be a bit riskier, or they might have a particular style of investing that works in some markets but not others.

Some numbers. In the Morningstar KiwiSaver survey for periods ending last June 30 there were 11 conservative funds that have been around for ten years or more:

  • The best in the last year came 10th — dead last — over 10 years.
  • The worst over 1 year came second over 10 years.

At the other end of the scale, in the highest-risk aggressive funds, there were just four with at least ten years of history:

  • The best in the last year was worst over 10 years.

There are similar findings in every Morningstar survey. In the most recent one, for periods ending last December 31, for aggressive funds:

  • The best over 10 years was worst over 1 year.

Admittedly there are also a few funds that have performed well over both long and short periods. Most often, though, the stars in one period are mediocre in another.

The point is that there’s no way you can predict which funds will do well in future. Think about it. Even if there were exceptional stock pickers in your fund — people who really knew their stuff in all different market conditions — how do you know those bright sparks are still working for that fund? Such clever people could easily be enticed away by other fund managers.

Another important point: You say that “not all or even most low-fee KiwiSaver providers are going to necessarily deliver the best result for KiwiSaver members.” Over single years you’re quite right.

That’s because most low-fee funds are passive or index funds. They simply invest in all the shares in a market index, and so are cheap to run — hence the low fees. That strategy means that over a year they will always put in a pretty average performance before fees. But after-fees it will be above average, because their fees are lower.

But still, who wants merely above average? I do, and I suggest you should too. With the other “active” funds sometimes doing well and sometimes not, it turns out that above average is probably the best you’ll get over the years.

So why do I push low-fee funds? Because they are your best bet for consistently above-average long-term performance, after fees.

As Warren Buffett — one of the world’s richest men through share investing — has said, “A low-cost index fund is the most sensible equity investment for the great majority of investors. By periodically investing in an index fund, the know-nothing investor can actually out-perform most investment professionals.”

If your high-fee fund keeps on doing better than the low-fee ones, over the decades, you are an extraordinarily lucky man.

QWe are a couple in our early 60s with a mortgage-free home and a decent retirement fund in a low-risk superannuation fund.

I have some shares to sell and would like to use them for a deposit on an apartment for our university-aged daughter, with the intention to rent it out until she is able to take over the mortgage.

With the Auckland housing market would this make sense, or would it be better to put the share money in my daughter’s high-risk KiwiSaver fund? Your advice would be appreciated.

AOh dear. Readers often ask me to predict what will happen in the housing market or share market. You want both. And I’m afraid I have to say “I don’t know” to both.

There are so many factors that affect both markets, many of them unpredictable. Who would have thought six months ago that a new virus could reduce many companies’ earnings? Go back a few years, and who would have foreseen leaky buildings?

That doesn’t stop people from making forecasts, but they’re wrong rather often.

What can we do about the lack of a crystal ball? If you’re thinking of investing in property or shares or a higher-risk KiwiSaver fund — which invests mainly in shares — you should assume the market might drop considerably soon after. What would you do if that happened?

If your answer is, “move to something with lower risk”, don’t go into the investment in the first place. Moving after a price drop means you’ve lost money. But if you would stay put, you’ll be fine. Eventually both the property and share markets will rise again.

What if you have the stickability, but you need the money in just a few years? You should also avoid these investments, unless you like risk and could cope with a loss. For most people, shares, property and growth funds are ten-year-plus investments.

How does all this apply to your situation? If you put the money into an apartment now, presumably your daughter will either own it for at least ten years or move to another property in the same market. So if the value falls in the meantime, it doesn’t matter much.

On the other hand, if you park the money in her KiwiSaver fund, and she withdraws it to buy an apartment in a short time, the share market might have dropped and she’ll have less for her purchase.

Buying the apartment now is lower-risk.

Having said all that, if your daughter does expect to use her KiwiSaver money fairly soon, she should switch to a lower-risk fund, as discussed in the next Q&A. In that case, putting your share money in her fund would probably be the lower-risk option.

Confused? Assuming your daughter reduces her KiwiSaver risk, there’s no clear answer. So do what suits you. Perhaps look at apartments, and if you find a suitable one go ahead and buy.

QSo I have been contributing into KiwiSaver for seven years and been in a couple different funds over that time.

Most recently I changed my fund from growth into conservative in anticipation of trying to purchase a first house soon, a move that may have been too impulsive.

Is there any downside to changing funds back and forth while not trying to time the market?

AAs far as I know, no KiwiSaver provider charges for moving from one of their funds to another.

And your reason for moving is the right one. Firstly, you switched to lower-risk funds because you expected to withdraw the money within the next few years. If that no longer applies, it makes sense to increase your risk again.

However, if you still think you’ll withdraw for a house purchase within, say, three to ten years, it’s best to go to just a medium-risk balanced fund. As I said above, growth funds are for ten years or more.

And by the way, you’re right, it’s not clever to switch because you expect the market to rise or fall. People get that wrong all the time.

QMy problem is I have a substantial share portfolio both in NZ and Australian shares. There are always a few shares in the red. When it comes to selling which do I sell first, the dogs (they will eventually become worth more than I paid) or my top performers?

Actual example: I am still down about 14 per cent on what I paid for Telstra shares in Australia, I am up about 250 per cent on what I paid for Auckland Airport. Both pay a respectable dividend.

AThis is turning into a column full of “I don’t know”s. I can’t predict: KiwiSaver performance, share market trends, housing market trends, and now how individual shares will perform.

But I don’t believe anyone else can either.

If someone could foresee good share buys, they could become hugely wealthy. Sure, some ordinary investors seem to make better decisions than average, but it’s probably luck, and that doesn’t tend to last.

So why can’t an ordinary investor — or an ordinary personal finance Q&A columnist — pick which shares to buy and which to sell?

Often you can get an idea of how well a company will perform in the near future, by looking at sales trends, management quality and so on. But so can everyone else. So if a company’s prospects look good, lots of people will want to buy those shares, pushing up the price.

Even if a company keeps growing, if you buy its shares at a high price that already takes into account its good prospects, the price won’t necessarily grow.

So what should you do? If you invest directly in shares, it’s best to hold a wide range — and don’t let one or a few shares dominate your portfolio.

The trouble is even a small holding might become dominant because that share has done really well — like Auckland Airport in your case. When that happens, it’s good to sell some of those shares, so you’re not too badly affected if that share price later falls. In other words, sell your winners.

By the way, not all “dogs” (what an insult to Fido!) will eventually come right. Some companies will fold and the shares become worthless. While a widely diversified share fund — such as a KiwiSaver fund — will recover from a downturn, not all individual shares will.

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Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to [email protected] or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.