When comparing funds, be sure you're comparing kiwifruit with kiwifruit - not apples, feijoas or some other totally different fruit. Photo / Getty Images
OPINION:
Q: Mary, thank you for posting the very informative link to Sorted's Smart Investor tool regarding KiwiSaver options. I checked my provider, ANZ and found:
• Growth fund average fees 1.41 per cent
• ANZ fees 1.23 per cent
• ASB fees 0.95 per cent
So it makes sense to switch providers. But wait, there's more!
• Average growth fund five-year returns 7.61 per cent
• ASB 5.92 per cent
• ANZ 8.14 per cent
Bearing in mind that "previous returns do not necessarily reflect future returns", but given their five-year performance, one could be confident that ANZ would continue to perform better going forwards.
So it makes sense (unless a mathematician proves me wrong) to stay with ANZ even though the fees are higher.
A: First, let's compare a kiwifruit with a kiwifruit, rather than a feijoa.
Within the growth fund category on Smart Investor are funds with 63 to 90 per cent growth assets — shares and perhaps commercial property. Sometimes a provider will have more than one fund within the growth category — or any other risk category actually.
It turns out that you are comparing ANZ's Growth Fund, which Smart Investor tells us has about 85 per cent growth assets, with ASB's Balanced Fund, with about 64 per cent. That's a big difference. We would expect a fund with more growth assets to have a higher average long-term return.
However, there is also an ASB Growth Fund, with 84 per cent growth assets — so it's fair to compare that with the ANZ fund.
The ASB Growth Fund charges fees of 1.0 per cent, and has five-year returns of 7.39 per cent. So it still has lower fees than the ANZ fund, and also lower returns — although 7.39 and 8.14 are in the same neighbourhood.
Your basic question is: should I go with lower fees or higher returns?
You acknowledge that higher returns don't necessarily continue, but then seem to think that higher performance over five years is enough to be convincing. Not so.
If you click on the fund names in Smart Investor you get more details. They show that the ASB fund outperformed the ANZ fund in 2017, 2018 and 2019. Before and after that, ANZ has done better, but the future is anybody's guess.
Even looking at 10-year performance tells us nothing about the years to come. Research on US share funds found the top 10 performers over a whole decade all performed from poorly to abysmally in the following decade.
It really is foolish to expect high returns to continue. Don't believe me? How about international financial services firm Morningstar? At the top of its quarterly KiwiSaver survey reports it says, "Please note:
• "Past performance is not a guide to future performance. This year's best performers can easily be next year's worst
• "Understanding your risk profile, and the mix of growth and income assets is critical.
• "Fees are the one constant that will always eat away at your returns. Take a close look at the cost of your KiwiSaver Scheme." Absolutely.
Q: We have some family money coming from recent land sales. Are banks safe places? We will eventually reinvest but just doing some thinking.
A: If you asked me this question two years from now, the answer would be easy. By early 2024, the Depositor Compensation Scheme — which will insure deposits of up to $100,000 per depositor at banks and licensed credit unions, building societies and finance companies — is expected to be up and running, says the Reserve Bank.
You could then spread your money — in $100,000 lots, or $200,000 lots in joint accounts — over many of the roughly 25 registered banks and "non-bank deposit takers" that offer retail deposit accounts. For more on this, see tinyurl.com/NZDeposits.
In the meantime, though, there's probably only one investment that's safer than bank deposits — the government's Kiwi Bonds, which you can buy through some banks, NZX brokers, accountants, solicitors and advisers.
You can invest $1000 to $500,000 in Kiwi Bonds, at 2 per cent for six months, 2.5 per cent for a year, 3 per cent for two years or 3.25 per cent for four years. But that's lower than most bank deposit rates, which you can check at interest.co.nz.
The safety of banks varies. Take a look at the Reserve Bank's Bank Dashboard, at tinyurl.com/BankDash. At the top are New Zealand banks' credit ratings from three international agencies, and below are graphs showing the different banks' capital adequacy, asset quality, profitability and so on.
Sounds too hard? The Reserve Bank gives brief explanations, and if you click on "what is this" at the top of each section, you'll see a short video about each measurement. It's honestly not difficult to get a feel for the strength of each bank.
Q: I try to "shop local" as much as I can, to support NZ producers.
I've been banking with BNZ for decades, but lately I've read articles that suggest banking with a New Zealand bank, like TSB, is preferable, to keep the business local.
Does it really make a difference where we bank?
A: Well yes. The Big Four banks in this country — ANZ, ASB, BNZ and Westpac — are all Australian owned. So a fair chunk of their seriously big profits end up across the Tasman. If all New Zealanders moved to locally owned banks, that money would largely stay here.
The catch is that New Zealand-owned banks, except Kiwibank, are not as strong financially.
The Bank Dashboard described above tells us that credit rating agency Fitch gives Kiwibank a higher rating than the Big Four, although Moody's rates those five equally.
Kiwibank also does well in most of the other measures in the Dashboard.
For other New Zealand-owned banks, though, it's patchier — although experts are not issuing warnings about them.
On the other hand, local banks tend to score better than the Aussie banks in Consumers NZ's survey on customer service.
"Market share doesn't reflect good customer service in our banking survey," says Consumer. "Two Kiwi-owned banks came top for customer service (The Co-operative Bank at 86per cent and TSB at 78 per cent), while the big banks scored between 54 per cent and 64 per cent."
If you're hesitant about joining a New Zealand-owned bank, other than Kiwibank, you might change your mind when the deposit insurance, along with other tighter bank regulation, comes into effect.
Q: My KiwiSaver with Kiwibank has performed well. Would it be a good idea to put extra capital into KiwiSaver instead of another managed fund? What would the downside? I am over 65 and I believe I can withdraw from KiwiSaver when I want to.
A: How wonderful to hear from someone who is happy with their KiwiSaver performance!
You've probably seen your balance drop over the last year. Like most KiwiSaver providers, Kiwi Wealth — which runs Kiwibank's scheme — reports recent negative returns for all funds except its cash fund.
But obviously you are taking a longer-term view, which is wise. Over the last five years, all Kiwi Wealth funds report positive returns. And, by the way, so does every KiwiSaver fund on Smart Investor — something for recent grumblers to keep in mind!
There's no reason why you shouldn't invest further in your KiwiSaver fund, as opposed to another managed fund. You're right that over-65s can withdraw some or all their KiwiSaver money at any time, although it may take a few days. But that can apply to a non-KiwiSaver fund, too.
Advantages of KiwiSaver over other funds are:
• The fees are usually a bit lower — which matters over the long term.
• While the government doesn't guarantee KiwiSaver, the Financial Markets Authority probably watches the providers and supervisors more closely than for other funds.
And something many over-65s don't realise: while you can be with only one KiwiSaver provider, you can be in more than one of their funds.
That makes it easy to have your short-term money in a lowest-risk cash fund, your three- to 10-year money in a fund that holds largely bonds, and your longer-term money in a higher-risk fund if you can cope with volatility. And that's the best way to set up your retirement savings.
Q: I am in a very similar situation to a reader last week, although a bit older, and intend to (need to) keep working for a few more years.
When my KiwiSaver unit rate decline became obvious earlier this year, I started to assess options and decided that I could withdraw the majority of funds, as you have suggested in last week's column. I intend to put it back when the decline bottoms out.
Understanding that this is impossible to predict, I am running a 30-day moving average on the unit price. My data shows an almost 12 per cent decline since the peak. It has only fallen another 3.5 per cent since I transferred it, and from the 30-day moving average it is almost time to transfer it back to take advantage of the expected cyclical upturn.
Is my assumption that being over 65, and hence having the ability to move it where and when you want, correct?
A: When I suggested last week's correspondent moves her KiwiSaver money to a lowest-risk cash fund or bank deposits if she expects to spend it within two or three years, the idea was to leave the money there.
But you are trying to time the markets. Yes, when you are over 65 you can move money in and out of KiwiSaver at will. But that doesn't mean it's wise. With your strategy, you could easily end up making losses real and then missing out on sudden recoveries.
When you stop to think about it, if you can work out how to miss the downturns but gain from the upturns, all the professional investors would do it, including KiwiSaver fund managers.
A few of them do try to do that to some extent, with mixed results. In the long run they don't tend to do better than the stay put-ers. And moving costs money, so those managers tend to charge higher fees.
The best advice on KiwiSaver after 65 is simple. Make sure you are at the right risk level — perhaps in several funds as described above. Then move some money once every year or two, to maintain your time horizons. Ignore market movements.
Bonus: it's much easier.
Q: I am in a KiwiSaver conservative fund, but am 80, and in the six months since I switched the money from bank deposits to park in KiwiSaver, I've lost a cool $38,000.
Time is not on my side for a recovery. I could use that money for a comfortable retirement abode at some stage, for example. It does give me security and choices. So I don't want it to crash again, or even dwindle. Would now be the time to switch it back to bank deposits?
A: I'm afraid I don't know what the markets will do next. And nor does anyone else.
It sounds as if you have been caught by the problem with the label "conservative" on KiwiSaver funds, which I wrote about last week.
Many conservative funds hold lots of bonds, and sometimes a fair few shares as well, and the values of both fall sometimes.
The only truly low-risk KiwSaver funds are cash funds, which hold term deposits and the like.
But even some of those also hold some bonds. Investors need to check — using the Smart Investor tool on sorted.org.nz — to make sure a cash fund holds only cash.
What you should do now depends on when you expect to spend the money. If it's within two or three years, I would move to either bank deposits or a KiwiSaver cash fund, for fear your balance could fall further.
Perhaps move one third now, one third in a month and one third in two months, so you don't move the lot at what turns out to be the worst of times.
But if you don't think you will use the money, or part of it, for three or more years, you will probably do better by staying put. It would be surprising for a conservative fund to keep losing value over that time frame. No promises though!
- 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. 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.
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