Diana Clement: The big crash is on its way

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COMMENT: The big crash is on its way. Be it next week or next decade, there will be what experts call a correction and everyone else calls a crash.

It's part of the life cycle of investing. It won't be the end of the world for people with money in KiwiSaver funds unless they're on the verge of retiring or buying a house.

Kiwis will panic unnecessarily and/or scream black and blue that they were sold a crock. The idea with KiwiSaver is that it's a long-term investment and the downturn, however catastrophic in the immediate aftermath, will be followed by recovery and further growth.

If you've chosen a fund suited to your time horizons and to a certain degree your nerves, then you haven't lost money.

NZ Superannuation Fund has predicted that another global financial crisis could wipe 50 per cent off the paper value of its investments. Its managers are not panicking because they also predict that the fund's overall portfolio will bounce back within two years.

KiwiSaver managers don't want to see their customers' balances fall — they will be blamed by many clients.

I asked all the providers last week what they're doing to lessen the effect of a sizeable downturn. Of those that replied, all that could, have taken multiple steps to counter this scenario.

Most are holding more cash, which means that for now they have reduced the percentage of the money invested in shares and other investments that are prone to big swings in price.

There is a very big range. ASB has increased cash holdings to 1.23 per cent of its growth fund. At the other end of the scale Juno is currently holding 60 per cent of its growth fund in cash.

Both Craigs KiwiSaver and ANZ pointed out that by having more money than usual on hand in cash they're in a position to buy bargain investments should share prices fall dramatically.

That's exactly what Generate KiwiSaver did when markets took a dive a fortnight ago.

The Amanah KiwiSaver Plan sold half its stock after earlier market wobbles in February of this year. It invested back in those that proved resilient. Just recently Amanah has bought more such investments.

Many KiwiSaver funds have investments that are designed to make money when markets fall, which helps smooth the ride. NZ Funds invests a portion of its KiwiSaver money in risk mitigation funds provided by third party companies such as Universa, which offers investments designed specifically to weather storms.

Craigs uses its Altum Fund as an insurance policy against market falls. Likewise Milford KiwiSaver has purchased options, which work as insurance, to protect against downwards movements in markets. Westpac's KiwiSaver's growth fund uses hedge funds for the same purpose.

Like others, AMP has a higher than usual percentage of its fund in cash. It has reduced its holdings of international bonds, and uses options to help protect funds from any significant downturn in international share prices.

Summer KiwiSaver has "rotated" its holdings into less risky "defensive" shares such as healthcare and utilities at the expense of more risky "cyclicals" including financial services and automotive. It is also avoiding fashionable investments such as Tesla and favouring large companies over small that don't do so well in troubled times.

Both Westpac and Christian KiwiSaver Scheme have taken related approaches. The latter has reduced its growth assets and is focusing on more conservative investments.

There are degrees to which providers change tack in uncertain times. ASB points out that it focuses on long-term goals, not short-term noise and takes a medium/long-term view on investing, part of which is accepting the ups and downs.

Simplicity can't do much in the background to avert losses because it's designed to track stock markets rather than make active decisions on what to buy. One thing Simplicity investors (and others who are that way inclined) can do if they truly think the market is due to fall, is switch their fund from growth to balanced or conservative.

If your prediction is wrong, however, you lose. What's more, doing this AFTER the crash is the very worst thing you can do because the horse has already bolted and you're locking in the losses.

The great thing about crashes is that if you continue to invest each and every month you'll be buying investments at bargain prices until they regain their value.

NZ Funds and others such as Mercer and ANZ have been focusing on educating clients and reminding them through communications to expect more modest returns than they'd seen in the recent past.

Diversification, as Mercer points out, is the "the only free lunch in investment". The more diverse the spread of investments the more likely the fund is to weather a storm.