QMy wife enrolled my now 14-year-old son in KiwiSaver several years ago, and we have made contributions sufficient to receive the government top-up. But he is just now starting to earn part-time income and making his own contributions.
Is now a good time to change him to a growth fund? I understand the logic of not “locking in losses” as the market falls. But as he would be changing to a more aggressive fund, is now a suitable time?
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.
QI am wondering if I should swap to a lower fee KiwiSaver provider (keeping the same mix of growth/balanced funds) to reduce fees paid. Is this “locking in” any loss or will it just be as I suspect — “like for like” share value with an advantage of not spending as much on fees.
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.
High Fees Don’t Bring Higher Returns
KiwiSaver Growth Funds’ average returns over 5 years to September 2021
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.
QWe have weathered four huge market declines and now once again we watch the value of our shares fall.
Then I look at my bank statements. The enterprises I have invested in are still in business and the dividends keep rolling in, to boost my pension. That’s why I read your weekly column and buy shares in sound businesses when the share prices drop.
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.
QI was getting a bit down when receiving monthly balance data from my ETF (exchange traded fund) manager (Smartshares), as I have continued to drip feed $400 a month in and most of the time the balance has been going down.
What I now do is manually multiply out my monthly units by the 12-month high unit price from my local paper, to get a wishful value for my portfolio when the markets bounce back. At least it cheers me.
I now worry that although I have a diverse share portfolio, do I actually own the shares, and what safeguards are there for the various share platforms not to go belly up? I guess I am just a worrier.
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.
QLetter from Susan St John, director of the Retirement Policy and Research Centre (RPRC) at the University of Auckland:
We note your support last week for the abolition of Total Remuneration (TR) in KiwiSaver. (This is when employees basically pay their own employer contributions.)
The issues are finely balanced, as a deep dive into this topic by the RPRC in 2020 discovered. There are two conflicting objectives — one is fairness to all, and the other is the incentive to belong and contribute to KiwiSaver.
TR does address the fairness issue by paying the same gross income to all employees whether in KiwiSaver or not.
Employees not paid under TR who are not contributing to KiwiSaver miss out on the 3 per cent employer contribution. This is a big issue for a lot of women who may feel they can’t afford the 3 per cent employee contribution.
The reason TR is not favoured, however, is it falls down on the second objective of incentivizing KiwiSaver.
The RPRC suggests there may be a compromise here that would be good for those who fall on hard times. Outlaw TR, but require that whether or not an employee contributes, employers are obliged to contribute 3 per cent to all who are KiwiSaver members.
Fairness for those who just can’t currently themselves contribute would be vastly improved. Gender pension gaps would be less. The incentive would still be there, but it would become an incentive to become a KiwiSaver member or at least not to opt out after auto enrolment.
Education and encouragement for those on savings suspensions could be quite aggressive, to make sure that when employees can afford 3 per cent they do restart contributions.
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.
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Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former 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.