Andrew Gawith: Cautious investors are right on the money

Many young people in KiwiSaver may have a short investment timeframe. Photo / Supplied

Are too many Kiwis stumbling into KiwiSaver and ending up in inappropriate conservative or default funds?

As Michael Raynes, Fisher Funds direct retail sales manager, has commented: "It's not sensible for more than 50 per cent of KiwiSaver members to be in conservative default funds. It is unlikely that default schemes suit the risk profile of most of their members."

That may be true, but there are a number of reasons why we shouldn't leap to the conclusion that Kiwis are being overly cautious either consciously, by default or out of ignorance when it comes to which KiwiSaver fund they choose, or default to.

Since KiwiSaver began, and with the benefit of hindsight, you'd have to say that the astute choice has been conservative or default funds - most growth funds are still below their starting points.

As the graph illustrates, a fixed-interest portfolio has comfortably outperformed a share-laden portfolio and not just over the past three years but for most of the last 10 years.

The counter argument that underpins concerns that KiwiSavers are being unduly conservative is that the past three and even 10 years are hardly typical of how financial markets behave over the long term, and therefore people should wake up to the fact that over the long-term growth funds will deliver higher returns than conservative funds.

But as Lord Keynes famously noted, in the long term we're all dead, so the question is how long have you got before you are able to access the money in your KiwiSaver account?

We normally think of this in terms of the age at which you become eligible to claim New Zealand Superannuation (currently 65).

But there are many young people in KiwiSaver who will be busily accumulating savings in their accounts to purchase their first home - their investment horizon may be quite short.

Roughly 50 per cent of KiwiSavers are either over 55 (less than 10 years to official retirement), or are between 18 and 34, many of whom may be looking to pull money out of their KiwiSaver account to purchase their first home.

So how long is the long term? As the graph shows, the last 10 years didn't produce the result most investment managers would have expected and conveyed to their clients; that is, a growth fund will eventually outperform a conservative fund.

To put it more starkly, had KiwiSaver been going since 2000, those who chose (or fell into) a conservative or default fund would have been well ahead of those who had chosen a growth fund. How certain can we be that over the next five years we will get a different result?

Another question to consider is how important KiwiSaver will be to your wellbeing in retirement. If it's nice to have a sum of money but not vital, then you may be prepared to chase higher returns knowing that there's a chance that your account balance will be in a slump when you come to claim it. If it's your only nest egg then making sure it's intact when you need it will be important and therefore a conservative fund might be appropriate even if you are 10-15 years from retirement.

For a lot of people KiwiSaver offers fantastic returns irrespective of whether they go for a conservative, balanced or growth fund. Over the first few years of KiwiSaver, the fund manager will have little impact on the growth in the value of the member's account. Those in paid employment earning up to $50,000 a year get their contributions matched by their employer and the Government. In other words, they are getting a 300 per cent return on their contributions.

Let's take someone on $50,000 a year contributing 2 per cent and ignore investment returns the manager may or may not be able to deliver, as well as fees and taxes, and any wage increases. After five years this person would have contributed $5000 to their KiwiSaver account, but the balance in the account would be $16,000 (includes the one-off kick-start payment of $1000). That's a pretty impressive 26 per cent per year return.

Whatever value the investment manager is able to add or subtract is likely to be relatively insignificant by comparison. Having said that the longer someone is in KiwiSaver the more important the investment manager will become in determining the growth in a member's account balance.

But at this stage it's not as silly as some think to choose a conservative or default fund and look after the employer and government contributions that are adding so quickly to your retirement nest egg.

The above arguments are important but there are few certainties in investment management. The longer you're in KiwiSaver, the more likely growth funds will outperform conservative or default funds and the bigger the impact your investment manager can have on your balance.

* Andrew Gawith is a director of Gareth Morgan Investments.