Liam Dann: KiwiSaver not the market medicine many hoped

KiwiSaver has been a great success but hasn't boosted local markets as hoped. Photo / 123RF

When KiwiSaver started in 2007 there were high hopes it would give our stock market a shot in the arm. It's probably been more like a kick in the pants, better than nothing but not the panacea many had hoped.

A decade ago there was optimism that as well as setting us all up for our retirement, KiwiSaver would direct loads of savings into the stock market providing capital to help accelerate corporate growth, create jobs, boost the economy and shift it away from a reliance on agricultural exports.

I don't think anyone expected a rapid transformation, but Australia's experience was cited as a great role model.

In Australia compulsory super was introduced in 1992 - by the end of 2016 Australians had $2.2 trillion in superannuation assets.

This makes Australia the fourth largest holder of pension fund assets in the world and explains why a lot of corporate New Zealand is owned by Australian-managed funds.

It has also made Australian workers more actively engaged in investment sector and is one of the great strengths of their economy.

Meanwhile New Zealand was burned by the big crash in 1987.

A large chunk of the wealthy baby boom generation was scared off stocks and looked to property investment - with all the well-canvassed social issues that has created.

Some headed for the burgeoning Finance Company sector to take advantage of high yielding debentures which - as it turned out - were exposing them to the risky end of the property development sector. That all came crashing down just as KiwiSaver was kicking off.

Essentially we've started 15 years behind Australia and are operating on a much smaller scale.

In New Zealand we have $40 billion in KiwiSaver funds now but, according to Morningstar data, only about 11.3 per cent of that is invested in the NZX - through equities and listed property funds.

That's about $4.5 billion into a market that currently has a total market cap of nearly $90 billion.

It's not an insignificant percentage. A positive spin would be to imagine the KiwiSaver capital as representing four $1 billion market cap companies. That makes it similar in scale then to the Government's asset sale programme which saw three power companies partially listed and a sizeable stake in Air NZ sold on market.

But across 10 years and against the backdrop of a market boom that attracted billions from offshore investors seeking solid yields, it's not really transformative.

That $4.5 billion figure is disappointingly low.

Obviously we can't expect KiwiSaver fund managers to weight portfolios more heavily towards New Zealand stocks for nationalist reasons. That would be foolhardy.

We're a small market, vulnerable to external shocks and Fund Managers' job is to look after our money.

That said the NZX did outperform the rest of the world for several years after the GFC so those that targeted high local weightings - like Milford's Trans-Tasman growth fund - have outperformed over the decade.

As the funds saved grow exponentially, so should the positive impact on the local market. If we keep pushing to improve it then we can look back on the 20-year anniversary with an even greater sense of pride and satisfaction.

It is a bit disappointing when KiwiSaver funds ignore the NZX altogether. KiwiWealth - formerly Gareth Morgan Investments - is now fully state-owned and invests nothing in the local market, claiming it is less risky to stick with global indexes.

Perhaps that's true for passive funds but the more active your fund manager is (ie buying and selling rather than just tracking the indexes) the more bias they can afford towards local stocks which they wil have better access to news and information about.

This just highlights that the easiest way to improve the ratio of KiwiSaver funds in the NZX would be to get more people out of defensive default funds.

Some 450,000 KiwiSavers are still sitting in the original default funds they were assigned when they joined. These funds are largely invested in cash deposits.

Conceived wisdom is that anyone with more than a decade until retirement should be looking at a balanced or growth fund with greater exposure to equities which outperform cash investments over time

My KiwiSaver provider puts just 8 per cent of its default funds into Australasian equities. So the NZX component is likely to be less than 4 per cent. But it allocates 25 per cent of its growth fund - which I'm in - to Australasian equities.

If more New Zealanders paid attention to the kind of fund they're in, not only would they earn more over their working life, that help balance the economy as well.

Stepping back though, it's clear that KiwiSaver's 10-year anniversary is still an early milestone on a path to a New Zealand with a much better savings record.

As the funds saved grow exponentially, so should the positive impact on the local market. If we keep pushing to improve it then we can look back on the 20-year anniversary with an even greater sense of pride and satisfaction. That's kind of how saving works.

It can seem pretty futile for many years, but if you keep at, stick to a plan and let the power of compounding returns kick in, it almost always pays off.