KiwiSaver caution minimises losses

By ROB STOCK - Businessday | Monday, 06 October 2008

Protective measures taken by many fund managers mean that although most growth and balanced KiwiSaver funds are showing painful losses over their first full year of existence, the blow from plunging sharemarkets has been softened.

October 1 was the first anniversary of the opening of KiwiSaver funds, but it is hard to imagine harder headwinds for KiwiSaver fund managers to contend with than 2008 has brought. Local and world sharemarkets have dropped dramatically as excesses of lending threaten the fabric of the American financial system and put a big strain on everyone else's.

But in the 12 months in which the NZX50, the ASX 100 and the American S&P 500 indices are down by a quarter or more, even the least impressive of the high-share content KiwiSaver growth funds are down less than 20%, with many showing falls in the range of 10-15%.

The softening of the crashes in market values has been largely due to nervous fund managers taking up higher than normal cash positions, partly in response to market conditions, and partly because they know the eyes of the investing public are on KiwiSaver.

Mark Brighouse, of Brook Asset Management, which has two of the very few growth and balanced KiwiSaver funds to end the year up on where they started, said: "There's often been this criticism that fund managers haven't done better than the market, but KiwiSaver fund managers have. KiwiSaver funds are really the flagship investment products for many fund management firms."

Brighouse said that had led many to take a more conservative approach to ensure they didn't end up at the bottom of the performance tables.

Not all active managers have managed that. Some have failed to outperform the tracker funds provided in the ASB KiwiSaver scheme.

Brighouse said many fund managers had typically been "set and forget" merchants that took long-term asset allocation positions (i.e. the proportions of their funds invested in shares, bonds, property and cash), and stuck to them through thick or thin.

That approach had fallen out of favour as markets became more volatile, he said, and managers were increasingly taking a shorter-term view when asset allocating.

Bigger fund managers were still hampered by the huge sums they had invested, Brighouse said, compared to the nippier, smaller fund managers that could change asset allocations rapidly.

Brook had managed to end the year up because of higher than normal cash holdings, and the better than market performance of the companies the funds were invested in. Most notably, Brighouse said, the funds held few financial companies such as banks, which had been horribly over-valued.

Gareth Morgan KiwiSaver has also been running high cash positions of between 30% and 50% throughout the first year of KiwiSaver's existence, which had contributed to its out-performing many other KiwiSaver managers.

Anthony Quirk, from Milford Asset Management, which runs the only KiwiSaver growth fund to outperform Brook's, said the firm's cautious view on shares had paid dividends, but he cautioned KiwiSavers not to lose sight of the fact that over the longer term market turmoil had been relatively rare, and the best way to built a decent retirement nest egg was still to invest in shares.

Quirk said the current market conditions were a one in a 100-year event. "I've seen nothing like it in 24 years in the markets."

Bernie O'Brien, from Mercer, warned, however, that KiwiSavers should not expect a US rescue package to lead to a quick bounce in markets, bolstering KiwiSaver funds.

"The markets are already pricing it in," he said.

It is not just the protective actions of fund managers that have limited the losses in growth and balanced KiwiSaver funds.

Though it is easy to focus on the growth and balanced funds, where losses have been highest, the most popular KiwiSaver funds have been the conservative ones, according to data collected by fund research house FundSource.

These have far less in growth assets such as shares, investing predominantly in bonds and cash.

Most show small gains in the range of 1%-4%, and the handful of pure cash KiwiSaver funds all finished with higher unit prices than when they began.

But fund managers are also quick to point out that many KiwiSavers in balanced and growth funds will actually be ahead even if their unit prices have dropped, both because of the $1000 kickstarter the government chipped in, and also contributions made by employers.

Rises and falls in unit prices are only part of the picture. All are quoted before tax is taken into account, but after the fund managers' fees. That means there may be some tax to pay on the accounts of KiwiSavers whose funds are exposed to overseas shares.

The timing and rate at which KiwiSavers saved into their accounts will also determine just how the movement in unit prices has affected them.

But though the date October 1 brings up the technical one-year anniversary of many KiwiSaver funds, the real anniversary is still a few days away. It was not until early or mid-October that many fund managers received meaningful flows of cash from the IRD to start investing.