Shelley Hanna: Aggressive funds carry extra risk

Q. We enrolled our 8-year-old son in KiwiSaver to get the $1000 kickstart. He is in the Fisher Funds Growth Fund. After nearly five years the value at the date of the last statement was $1060. Over the quarter $6 was paid out in fees and the fund lost $3.41 in value, so it was down $9.41 over that quarter. Is there a risk that fees and investment losses will eat up the value of fund over the next 10 years?

A: The Fisher Funds Growth Fund is listed among the aggressive funds in the quarterly KiwiSaver report from Morningstar at www.morningstar.co.nz.

It has done well among its peers ranking second over four years - but with an average return of just 1.8 per centp.a. over that time. Yes, markets have not had an easy ride over the past four years. The worst ranked fund in that sector averaged negative 4.1 per cent p.a. over the past four years.

What about fees? You can compare KiwiSaver fees in the Morningstar report as well - the difference between highest and lowest is around half a per cent. Performance has a far greater impact on fund value than fees.

Let's go back to the Morningstar rankings and see how less aggressive funds have fared. In the balanced sector, the top performing fund averaged 3.8 per cent p.a. over four years. The top performing conservative fund went even better with 5.9 per cent p.a. These returns are all before tax but after fees.

We do not know how well markets will perform over the next 10 years. If your son's KiwiSaver fund achieved an average of negative 3 per cent p.a. for the next 10 years he would have a balance of around $780 at the age of 18. With a positive return of 5 per cent p.a. the balance would be closer to $1730.

KiwiSaver members - and this includes your son - who are not making regular contributions to their fund may be better off in a more conservative fund. The volatility you can expect from an aggressive fund works well for regular savers, including those on salary or wages. The more aggressive the fund the more ups and downs you'll get in the unit price. If you have some big dips during the year, you should end up with more units for your money so that when the market recovers you'll be better off than someone who has made no contributions during the year. This is known as Dollar Cost Averaging. While the Fisher Growth Fund averaged just 1.8 per cent p.a. over four years, and was negative 8.7 per cent over the past year, the average over the past three years was a stellar 14.3 per cent p.a. A rocky ride indeed. Great for regular savers, but not for a lump sum investor.

Some parents do make regular contributions to their children's KiwiSaver fund, although they do not qualify for MTC credits from the Government until they are 18. If this is not an option for you, perhaps a conservative fund would be more suitable for the next 10 years. Talk to your fund manager (Fisher Funds does have a Conservative Fund option) or an Authorised Financial Adviser.

Shelley Hanna is an Authorised Financial Adviser, FSP12241. Her disclosure statement is available on request and free of charge by calling 870 3838. The information contained in this article is of a general nature and is not intended to provide specific or personalised advice. If readers have any KiwiSaver questions please go to www.peak.net.nz or email shelley.hanna@peak.net.nz