The KiwiSaver market is likely to consolidate again as providers face up to profitability challenges, according to Morningstar director of manager research Asia-Pacific, Tim Murphy.
Murphy said the long-term sustainability of some providers was doubtful in a relatively small market beset by intense regulatory fee pressure and limited growth opportunities.
“It’s questionable if many of the smaller schemes are profitable,” he said, “KiwiSaver providers are for-profit entities. But even in Australia – where the large industry funds operate as not-for-profits – super fund fees are higher than in KiwiSaver.”
Morningstar data shows as at the end of last year KiwiSaver provider funds under management (FUM) ranged from $27.4 million for the Kōura Wealth to the almost $19.3 billion held by ANZ across its three schemes.
The research house captures over 90 per cent of total KiwiSaver FUM but it excludes about a dozen providers such as restricted schemes and smaller boutique and start-up operations. Notably, NZ Funds, which reported total KiwiSaver FUM of about $600 million at the end of last year opted out of the Morningstar research early in 2020.
Following an earlier period of consolidation that took KiwiSaver scheme numbers below 30 in 2018, the market has expanded again with a slew of new releases bringing the universe up to 37 by last year: Fisher Funds has since bought the Aon scheme.
By contrast, Australia has seen a splurge of big super fund mergers over the last few years – 32 since 2017, according to a November 2021 KPMG report – driven by scale-seekers and regulatory pressure.
But while internal profitability pressures may trigger a new round of domestic KiwiSaver M&A activity, Murphy said offshore firms would also be keeping a close eye on the market.
“As KiwiSaver assets under management continues to grow it will attract the attention of larger global players – for instance, they will be seeing what BlackRock has done with the AMP and ASB schemes,” he said.
BlackRock took over as underlying manager for most of the $6 billion AMP KiwiSaver scheme last year while signing a wider investment management agreement with ASB at the same time. ASB is the second-largest KiwiSaver provider with about $14.5 billion under management.
Kiwi Wealth, which manages a $7 billion KiwiSaver scheme, is also reportedly in play with Australian-based institutions potential buyers.
In the December quarter Morningstar KiwiSaver report, Murphy says the “six largest KiwiSaver providers account for approximately 71% of assets on our database”.
The Morningstar data also shows most diversified KiwiSaver funds returned in excess of 1 per cent in the final three months of 2021, reflecting the “resilient underlying market conditions”.
“Over 10 years, the Aggressive category average has given investors an annualised return of 11.6%, followed by Growth (11.3%), Balanced (9.1%), Moderate (6.6%), and Conservative (5.8%),” the report says.
Morningstar also reveals the KiwiSaver manager of the year in its annual NZ award ceremony scheduled for an online-only airing on March 4.
ANZ, Kiwi Wealth and Milford will contest for the top KiwiSaver gong. Milford also features in two of the three other Morningstar categories with Harbour, Hunter, Nikko and Australian manager, Bentham, also vying for various awards.
Murphy said Morningstar has dropped the global equities manager of the year prize this year as no providers met the researcher’s criteria.
Most global equity managers available to NZ investors in the Morningstar database “underperformed the index” last year, he said.
“Many were caught out by the rotation [from growth to value stocks],” Murphy said.