Stay aware - but don't be too concerned about share market falls, say KiwiSaver fund managers.
Stay aware - but don't be too concerned about share market falls, say KiwiSaver fund managers.
One of New Zealand's KiwiSaver funds managers says that investors shouldn't be concerned by the drop in the share markets overnight, but they should be aware.
Share markets around the world have took a hit overnight as investors continued to offload their shares in the wake of extreme market volatility in the world's second biggest economy - China.
In the opening minutes of trade this morning, the S&P/NZX 50 Index was at 5,473.5, down 134 points or 2.4 per cent. It has since improved to be down just 1.7 per cent.
On Monday, the index lost 143 points, or 2.49 per cent, to 5616, and about $2.25 billion was shaved off the market's total market capitalisation.
Equities manager at JB Were, Rickey Ward said New Zealanders shouldn't be concerned, but it was important for them to be "aware" of the situation.
"Most people believe equity markets around the globe have been trading on elevated multiples for quite some time and that is because interest levels have been quite low compared to historical levels which has pushed an incentive for investors to take equity risks to get fixed interest returns.
"All we are seeing is a bit of a reset or a correction on that. I don't think people should be afraid," he said.
"If you thought we were going into another deep dive pre GFC type situation then yes, that would be more of an issue but I haven't come across any commentary or information that suggests we are entering anything like that, it is just more of a reset on elevated multiples coming back to more realistic levels."
KiwiSaver is more of a longer dated incentivised product and in that respect, overnight shakeups, will have a very small impact on you if you are younger because you have a longer period to earn that back.
The type of investments a person has would be a major factor in how much their KiwiSaver would be affected by the shakeup, Ward said.
"In a 24 hour period clearly it will negatively impact KiwiSaver but the extent of that depends on what product an individual has invested in. The default providers have certain criteria around them to be more fixed interest orientated rather than growth oriented so they will be protected to a certain extent," he said.
Individuals with high risk investments however, would be more affected.
"KiwiSaver is more of a longer dated incentivised product and in that respect, overnight shakeups, will have a very small impact on you if you are younger because you have a longer period to earn that back," Ward said.
"The issue would be is if you are approaching retirement and you had a quick sharp decline then you will be impacted on a bigger sum.
"The older you are, the bigger the sums you will have and the closer you are to exiting KiwiSaver and therefore moves like last night will have a bigger bearing on you whereas if you are younger and building your savings rate up, last night will have less of an influence on you by the time you get to retirement."
It is a long-term investment. It certainly is not a wise idea to make knee-jerk changes based on a little bit of volatility.
Ward said the issue with KiwiSaver was that it didn't distinguish between ages. "As you get older you should be encouraged to take less risk which means less equities but KiwiSaver is not really structured for that so overnight moves will have impacted people."
Tim Murphy, director of manager research at Morningstar Australasia, said clearly equity markets around the world were suffering big draw-downs this week and any KiwiSaver fund with exposure to equities was likely to have suffered some short-term losses.
Murphy said conservative KiwiSaver funds would have held up better as they had less money invested in shares and more in bonds which had picked up recently.
He said the higher a fund's exposure to shares the more it was likely to be affected by the markets falling.
But he said fluctuations in the share market were part and parcel of being an investor and those in KiwiSaver should not make any knee-jerk reactions.
"It is a long-term investment. It certainly is not a wise idea to make knee-jerk changes based on a little bit of volatility."
Murphy said it was unknown how long the markets would continue to fall for. "How long is a piece of string?"
But investors who pulled out of a growth fund to move into a conservative fund would risk crystalising their losses and then could miss out when the market turned upwards again.
Long-term investors need to be embracing equity markets but part of the deal is to stomach the ups and downs along the journey. It is going to be an important lesson for many people.
Murphy said KiwiSaver funds had performed very well over the last six years and this should serve as a learning curve to savers that markets can go up and down.
"It is an important part of learning about the markets. Long-term investors need to be embracing equity markets but part of the deal is to stomach the ups and downs along the journey. It is going to be an important lesson for many people."
Murphy said over the long-term markets tended to go up but people needed to hold on for the bumpy ground.
