NZ Herald 9 July 2022

AThe “don’t lock in losses” rule doesn’t apply quite so much in this particular downturn.

Usually the advice runs like this: When share prices fall, the value of units in higher-risk KiwiSaver and other funds that hold lots of shares also falls. If you stick with the investment, the value will rise again, and you won’t have lost anything. But if you move to a lower-risk fund, you’re selling units at a low value and buying units that haven’t lost value, so your loss becomes real.

This time around, though, many lower-risk KiwiSaver funds have also lost ground, because rapidly rising interest rates have reduced the value of bonds issued with the old lower interest. This applies to many balanced and conservative funds that hold lots of bonds.

Only the lowest-risk defensive funds that hold mainly or all cash have been largely unaffected by this downturn.

So the usual advice doesn’t really apply unless you switch to a fund with largely cash holdings. A move from, say, a growth fund to a conservative fund means you sell units at a low price, but also buy at a low price. That’s okay.

But as you suspect, this doesn’t apply to your son anyway. He would be moving to a higher-risk fund, and it’s fine to do that whatever the markets are doing.

The only reasons not to make the move are:

• Your son expects to spend the money on a first home within about ten years. He sounds like an enterprising young man, working part-time at his age, but he probably won’t be in the house market within a decade. When he does get to the ten-year point though, I suggest he gradually reduces his risk.
• He would panic if he saw his balance drop in a downturn, and move to a lower-risk fund.

Talk to him about the switch. Show him this Q&A. He’s old enough to understand what’s going on.

By the way, your son won’t have been receiving the government contributions to his KiwiSaver account, as he’s not yet 18. But it doesn’t really matter. You’ve been helping to build up his balance.

Nor does his employer have to contribute 3 per cent of his pay until he’s 18, although many do. After all, 3 per cent of a part-time teenager’s pay is hardly going to send the boss broke. It would be great if your son is receiving this boost.

AIt’s great that so many people are getting the “don’t lock in losses” message — even if it doesn’t actually apply to you and the previous correspondent!

Unlike him, you’re talking about switching provider, not fund level. And you’re right. There’s no reason not to move to a similar fund — for example growth to growth — with a different provider, regardless of what markets are doing. You are indeed swapping like for like.

And moving to a provider that charges lower fees is a wise move. There’s no good evidence that funds that charge higher fees perform better.

For years I’ve been watching the graphs on the Financial Markets Authority’s KiwiSaver Tracker. Our graph is an example — showing the average annual performance, after fees, of KiwiSaver growth funds that have been around for five or more years.

This is the most recent data available, for the five years ending last September 2021. With recent falls in unit values the latest five-year returns would be somewhat lower, but not much. Over five years, growth funds nearly always perform pretty well.

Each dot on the graph is a growth fund. The higher a dot is, the better its average return is. The further to the right the dot is, the higher its fees are.

If funds charging higher fees performed better, we would see lower dots on the left side, where fees are lower, and higher dots on the right side. Instead, the dots are all over the place. The best performing fund — the top dot — has about an average fee, and many of the other high performers charge middle to low fees.

In other words, this graph shows that growth fund fees and returns are not related in this period.

You get similar results if you go to the FMA tool here and look at funds at other risk levels. Sometimes there seems to be some relationship between fees and returns, but if you look in the next period it will probably be gone.

The conclusion: Given that nobody can predict which funds will perform well in the future, you might as well choose among the low-fee ones. There’ll be more money left in your account.

A few points if you play around with the KiwiSaver Tracker:

• Choose the average five-year returns, not the one-year returns. You can’t conclude anything from short-term results.
• You can choose a graph of all the fund types — from defensive to aggressive — at once. If you do, there seems to be a clear relationship between higher performance and higher fees. But that’s deceptive. It’s because higher-risk funds usually bring higher average returns. And — across all providers — higher-risk funds tend to charge higher fees. Confused? I suggest you stick to the graphs of each fund type.
• If you hold your cursor over a fund, you will get its name. You can do that to find a lower-fee fund that has performed well over the last five years, but that fund won’t necessarily do well from now on.

The best way to find a low-fee fund is with the Smart Investor tool on sorted.org.nz. Click Compare, KiwiSaver Funds, and the risk level you want — from defensive to aggressive. Then scroll down and sort by “Fees (lowest first)”. For more info on a fund, click on its name.

AA great attitude. In an economic downturn some companies will fail. But the vast majority — and especially the solid businesses — won’t.

Read on for another investor’s coping mechanism.

AI like your 12-month-high tactic. What’s more, I’m sure that in due course the unit price will go even higher than that. Meanwhile, keep contributing, knowing that you are buying units cheaply.

On your worries, I asked the FMA, which is the regulator of ETFs, KiwiSaver and other managed funds — collectively called managed investment schemes (MISs).

Let’s look first at what you own.

In all these funds, your money is pooled with other investors’ money. “Investors own ‘units’ representing their ownership of the fund and don’t directly own the investments that the fund holds (e.g. shares),” says a spokesperson for the FMA.

“The value of your investment in the fund is based on the value of the assets the fund has invested in (minus fees and expenses). While there are management fees and other expenses charged when investing in a MIS, it is an efficient way for an investor to access a professionally managed and diversified portfolio of investments with a single purchase.”

More information can be found in the FMA’s guide to managed funds.

What about safeguards for MISs?

“All retail New Zealand MIS managers must be licensed by the FMA and have their assets held in custody by an independent custodian,” says the FMA.”The fund and its investments are held independently of the MIS manager and of the custodian itself, in other words ‘ring fenced’.

“Any claims against the MIS manager or custodian would not affect the assets of the scheme. So if a manager were to go ‘belly up’, investor funds would be protected, and a new manager would be appointed to manage the fund.”

On share trading platforms, “Share brokers providing custodial services must also comply with custodian regulations. This includes the requirement to report to clients and to obtain an assurance report, which is based on a qualified auditor’s review of processes and controls of the custodian to ensure there are sufficient protections in place.

“Investors using share trading platforms should take the time to understand how their money is held, as some platforms will have investor money held in custody by an offshore custodian, which will also be subject to regulations in that jurisdiction.”

I hope that helps you rest more easily.

AI like your idea. The many thousands of people who are currently on savings suspensions — which used to be called contributions holidays — don’t seem to be motivated to start saving again by the fact that they miss out on employer contributions.

Maybe they would be encouraged to take part when seeing their savings grow because of employer input. It’s worth a try.