KiwiSaver is now worth around $90 billion. Photo / NZME
KiwiSaver is now worth around $90 billion. Photo / NZME
OPINION:
KiwiSaver has fast become an asset of national importance, with its benefits stretching well beyond the positive saving habits it has instilled and the substantial retirement nest eggs it has helped us create.
The now impressive size of KiwiSaver makes it a genuine driver of growth for the NewZealand economy. But, to deliver on its full potential, a wider array of investments should be considered.
At around $90 billion, KiwiSaver is now around 25 per cent of New Zealand GDP (gross domestic product). That's an impressive amount of savings.
One of the many benefits of this large and growing investment pool is that it gives managers the ability to diversify and broaden the range of investments they can make on behalf of members.
This is potentially a win-win situation. As more attractive and unrelated investment opportunities get uncovered in areas of the economy that are yet to feel the full benefit of this capital.
A goal should be to ensure more of New Zealand gets their piece of the pie
Looking across the industry, only a small portion of KiwiSaver funds are invested outside of a small group of our country's largest companies.
The problem here is, as we know, it's not the ultra-high end of town who have trouble attracting capital.
The domestic fixed-interest market provides a clear example of this.
The benchmark that most KiwiSaver funds follow is an index with less than 30 domestic companies represented in it. While there are around 2500 large companies (100+ employees) and over 10,000 medium-sized companies (between 20-100 employees) in New Zealand currently.
Some KiwiSaver providers do venture outside this benchmark's constituents in the search of other attractive fixed-interest investments.
But with only around 20 other local issuers with bonds listed on the New Zealand Debt Exchange, the traditional public fixed-interest market does not provide much scope for lending to a wide array of great Kiwi businesses.
The banking industry is undergoing change and a new breed of lenders is emerging.
At least some of this lack of diversity is because of how well the banks have served Kiwi companies in the past – leaving them with little reason to look for alternative funding sources. But this is changing.
Tighter regulation, designed to strengthen deposit-taking institutions and reduce systemic risks, has seen a ratcheting up of the capital requirements New Zealand banks face. These requirements appear to be having the same effect they have had in many other parts of the world including the United States, Europe, and Australia.
David McLeish senior portfolio manager fixed interest at Fisher Funds.
These pressures are causing our banks to become more selective around the size and types of loans they are willing to make to certain borrowers.
The retreat of our banks creates a gap that KiwiSaver can fill.
New Zealand's lending landscape is shifting, with some borrower segments finding they no longer fit as neatly inside the prescribed parameters of a bank's lending policies as they once did.
Although banks still dominate the corporate lending market in New Zealand, we are seeing them slowly retreat from areas like the "middle market". Banks and their medium-sized customers, who might be too small, or not borrowing frequently enough, to justify tapping the public debt market, are increasingly looking for new lending partners to help with their next stage of growth.
The potential for KiwiSaver to be part of the solution is clear. As an investor with experienced "boots on the ground" in this area, we are excited by the opportunity this presents. And because of the emerging supply/demand imbalance in this area, the investment yields are much more appealing than what can be achieved in the public fixed interest market at present.
A vibrant non-bank lending market is also taking shape.
Another area where banks have been pulling back is in the asset-backed market. These are loans backed by collateral such as houses, equipment, and vehicles.
In response to growing customer need, a cluster of experienced non-bank lenders have been slowly increasing their presence, stepping in to fill the void being left by the banks.
This is a really positive development. But because most non-banks do not take in deposits, they must first source the funds they need to make the loans. This is typically achieved through a process called securitisation, where the underlying asset is used as collateral to secure the required funding. The issue they often find though is that, given the complexity of these structures, the typical list of would-be funders is often small.
That's where experienced KiwiSaver managers can play a role. Providing funding to long-standing, conservative non-bank lenders backed by large and diversified pools of hard assets, at attractive yields, is another important avenue where KiwiSaver can achieve positive investment outcomes for members and New Zealanders.
KiwiSaver is a game-changer for our economy
The opportunity for KiwiSaver to play a wider role across the New Zealand lending landscape is clear. In addition to those already mentioned, we see funding opportunities in infrastructure, commercial property, social development, and green energy.
The future is bright for investment in New Zealand.
David McLeish is a senior portfolio manager and head of fixed interest at Fisher Funds
