Mary Holm on KiwiSaver: Should I switch to a high growth, aggressive fund?

Going up, things can be very good, but coming down, it can get nasty. Photo / 123RF

OPINION:

Q: I've just switched to the Kernel High Growth KiwiSaver fund, as I wanted low fees, index investing, and I won't touch KiwiSaver for a couple of decades. Are there any issues with high growth options?

I'm surprised my previous provider didn't offer it, and there don't seem to be many choices, but I thought that it would help maximise my retirement savings given how long I've got to go, say compared to just growth.

A: We don't hear a lot about the riskiest KiwiSaver funds. I suspect many people who have invested in a fund with "growth" in its name think they are at the highest risk level, but in many cases they are down one step from the top.

The highest risk KiwiSaver funds are called aggressive funds in the Smart Investor tool on sorted.org.nz. Ninety per cent or more of their investments are shares and/or commercial property.

Growth funds, the next level down, hold 63 to 89.9 per cent shares and/or property. So while some of them are fairly high on the risk scale, others have considerable holdings in bonds. In recent months, with rapidly rising interest rates, the value of those bonds has fallen, affecting fund performance. But usually funds with lots of bonds are less volatile than those with largely shares.

Readers can check their fund's holdings on Smart Investor. Under "Mix" click details, and you'll get the asset mix, and if you click on the fund's name you will get access to much more detail about the fund's holdings.

Smart Investor tells us that the Kernel High Growth Fund is an aggressive fund, with about 95 per cent shares and 5 per cent property.

Aggressive funds are like the little girl who had a little curl right in the middle of her forehead, in the Henry Wadsworth Longfellow poem. When she was good she was very good indeed, but when she was bad she was horrid.

Most of the time, an aggressive fund's returns will travel along a bumpy but upward path, but they will sometimes soar and sometimes plunge.

But as you say, in the long run you will almost certainly end up with more in your account than in a lower-risk fund.

You seem to tick the boxes for such an investment. It's best if you don't plan to spend the money for at least 10 years — and you have double that. And it sounds as if you will cope with the inevitable big downturns. Be prepared to see your balance halve — picture $200,000 becoming $100,000.

I applaud your choice of a low-fee fund. At 0.25 per cent, Kernel's High Growth fee is not only the lowest of the aggressive funds, but one of the lowest fees of any KiwiSaver fund. As I've said many times, low-fee funds tend to perform as well as higher-fee funds over the long term. So, after fees, their returns tend to be higher.

Your comment about choice is interesting. There are actually 96 aggressive KiwiSaver funds on Smart Investor, way more than in any other risk category. The second biggest is balanced funds, with 65.

However, the aggressive category includes all sorts of specialist funds. Some invest in, say, clean energy shares, or infrastructure, or resources shares. Some concentrate on smaller "mid-cap" companies. Some go for shares in emerging markets or in particular regions. One even invests in carbon-neutral cryptocurrencies.

There are also several aggressive funds that invest only in commercial property — which might appeal to New Zealanders who can't see past property as an investment.

If we narrow our choice down to aggressive funds with broad-based investments — and it's wise to go with those ones for the bulk of your savings — there are not so many choices.

I agree that a fund like yours has a strong likelihood of maximising your retirement money. Just remember, you must not switch to a lower-risk fund, regardless of how badly the share markets might fall. They always come right in the end.

For more on one interesting aggressive fund, read on.

Q: What is your opinion on geared aggressive funds? I have recently changed to Booster's Geared Growth KiwiSaver Fund, having reset my balance to zero after using my KiwiSaver for a first-home deposit. Hence I am looking to make as much returns as possible over the next 35 years. Speaking with my friends, I was surprised to find most of them hadn't considered an aggressive fund. There aren't many funds out there that use gearing either.

Now the fees are a lot higher due to interest costs, but you do get a rebate on some of the management fees once you build a significant balance. It seems like a no brainer to me and I am glad I managed to accidentally pick the perfect time to withdraw my funds, albeit I did buy at the peak of the housing market. I am interested to see if you think I would be better off in an aggressive low-fee fund?

A: Firstly, let's explain to others what a geared fund is.

When you gear, you borrow to invest. Most commonly, New Zealanders do that to buy their home or an investment property. But you can also do it to buy, say, shares.

Gearing ups the ante. If your investment does well, you earn returns not only on the money you put in, but also on the borrowed money. But you have to pay interest on the borrowing, so returns need to be higher than the interest paid, on average, for the investment to go well.

If the returns are lower than interest payments or, worse still, if your investment makes losses, all is not well. You're paying interest while going backwards. The little girl poem above applies even more!

The gearing in the Booster Geared Growth Fund can vary between 0 and 50 per cent of the fund's value, with a typical level of 35 per cent.

Booster gives this example: If the gearing ratio is 35 per cent, and the underlying investments grow 10 per cent, an investor's return would be 13.5 per cent. But if the investments fall 10 per cent, the investor's balance would fall 13.5 per cent.

We can see this effect in real numbers from the past 10 years on Smart Investor:

• When the average return for aggressive KiwiSaver funds decreased, the Booster fund's returns often decreased more.

• In the one year when returns were negative, ending March 2020, the average aggressive fund return was minus 6.4 per cent, while the Booster fund's return was minus 7.5 per cent.

• But when the average returns increased, the Booster's funds returns increased more.

• In the year ending March 2021 — a year of extraordinary growth because it started at the bottom of the 2020 Covid downturn — the Booster fund earned 46 per cent compared to the aggressive fund average of 34 per cent.

A clear downside of the fund is that the fees are high. Smart Investor says they are 1.87 per cent compared with the aggressive fund average of 1.07 per cent.

But it's more complicated than that. Booster estimates its fee at 1.74 per cent plus a $36 member fee, but the investor also pays an interest cost estimated at 1.48 per cent, which reduces your unit price.

A Booster spokesperson says the actual fees in the year ending March 2022 were 1.51 per cent plus interest of 0.57 per cent. But that's still a big whack going out of your account one way and another.

There is also a capped performance fee, which you pay when the fund performs particularly well.

Ready for more complications? As you say, the fees are reduced somewhat if you have a balance of more than $200,000, and that fee rebate gets bigger the higher your balance.

So where are we? This is not a fund for everyone — because of its risk and its fees. Indeed it has just 11,428 members, plus 429 in the recently opened socially responsible version, which you might want to look into — although the fees on that are even higher.

The Geared Growth Fund currently holds about 94 per cent shares, 5 per cent property and 1 per cent cash. And Smart Investor shows us its investments are widely diversified.

So it's highly likely that over time it will have more growth years than negative years.

You have 35 years to play with. As long as you stick with your investment through bad times, you are likely to end up doing well.

But whether this fund will do better than a lower-fee ungeared aggressive fund, like the one in the above Q&A, is anybody's guess.

Q: My daughter is in her early twenties and currently studying offshore.

My wife and I would be keen to know whether my daughter can establish and contribute to a KiwiSaver account, and whether she would be eligible for the annual government contribution should she make the individual contribution thresholds.

A: To join KiwiSaver you have to be both:

• "a New Zealand citizen, or entitled to live in New Zealand indefinitely.
• "you live or normally live in New Zealand."

So whether your daughter would be eligible to join depends on whether the second condition applies. Is she away just temporarily, or is it more long-term?

Similarly, to receive the government contribution your daughter must live mainly in New Zealand — unless she is working overseas either as a government employee or as a volunteer.

She might have to wait until she comes home. But do urge her to join as soon as she is back here.

By the way, there is no threshold to get the government KiwiSaver contributions. If you contribute just $1 in the July-to-June year, the Government will put in 50 cents. They put in half the amount you put in — up to a maximum of $521 if you contribute $1042 or more.

Q: Reading a letter in your column about the potential benefits of continuing to save in a KiwiSaver fund, rather than a non-KiwiSaver fund, after retiring, I wondered about the implications for the surviving spouse of couples who normally share their financial investments.

My husband and I have ensured that all our bank accounts, term deposits, and other investments are in joint names, and my understanding is that this should make access to these funds relatively quick and easy for a surviving spouse on the death of their partner.

Am I correct in assuming that the process would be less straightforward for money invested in a KiwiSaver scheme, since as far as I'm aware these can't be held jointly? If so, this may be something worth considering for others when deciding where to invest later in life.

A: You're right that KiwiSaver accounts can't be held jointly.

When a person dies, their KiwiSaver balance becomes part of their estate. "This is a legislative requirement, and so unlike insurance policies, and some overseas superannuation schemes, you cannot nominate beneficiaries to receive your funds directly from your KiwiSaver Scheme," says Kristine King, deputy chair of the NZ Law Society's Property Law Section.

So how long might it take for the beneficiaries of an estate to get the KiwiSaver money?

Typically, in a straightforward situation, it will take between about eight months and 14 months from the person's death, says King.

This is quite different from joint bank accounts and so on, which are transferred to the surviving partner when they show the bank the deceased person's death certificate. So that's normally fairly quick.

It strikes me, though, that there's an argument here for each person in a couple having their own KiwiSaver account. Once they are over 65, they can access that money whenever they want it — including right after the death of their partner.

If one partner isn't in KiwiSaver, they can open an account at any age. The couple could then transfer, say, half the money from the other person's KiwiSaver into that new account. Similarly, if the two partners' account balances are very different, they could be equalised by transferring money.

In most cases, having immediate access to half the couple's total KiwiSaver money, with the other half available in perhaps a year or so, will be fine.

- Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or click here. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.