Most KiwiSaver default funds fell into the red during the March quarter ahead of a genre-defining government decision on the fate of the sector.
The latest Morningstar quarterly KiwiSaver report show default fund returns over the three months to March 31 ranged from -1.1 per cent for the Mercer option to just-above par returns of 0.1 per cent for Kiwi Wealth and AMP: Fisher Two was flat for the same period.
However, for all other periods tracked in the Morningstar report default fund returns remained positive, generally within a tight band.
During the five years ending March 31 the nine current default schemes returned between an annualised 4.5 per cent (AMP) and 5.2 per cent (Fisher Two and Kiwi Wealth), according to Morningstar. Only five default schemes have a 10-year track record with annualised returns spanning the low of 4.8 per cent (AMP) to 5.9 per cent for ANZ.
Total default fund assets topped $10.3 billion at quarter-end, the Morningstar figures show, led by ASB ($4.1 billion) followed by AMP (about $1.4 billion).
The Morningstar report overstates the true ‘pure’ default assets under management as several schemes, including ASB, mix all conservative fund members in one portfolio. As at the end of March last year, the Financial Markets Authority (FMA) counted about 380,000 default members (who had yet to make an ‘active choice’) with a collective $4.3 billion in funds under management. Overall, conservative options held about 690,000 members, the 2020 FMA KiwiSaver report says.
The government is set to confirm a new panel of default providers this month, previously stating a preference to reduce the population from nine to five (or fewer). At the same time, the default fund asset allocation will switch from conservative to balanced – plus additional mandatory fossil fuel company share exclusions – once the new regime kicks in this December.
Morningstar figures show default fund annual fees range from 0.38 per cent for the Booster scheme to the 0.73 per cent charge to Kiwi Wealth members: both providers (as well as BNZ) also don’t charge fixed dollar annual fees. However, the remaining six KiwiSaver default funds tack on an annual member ‘administration’ fee ranging from $18 (ANZ) to $27 (Mercer).
The government default provider selection process includes a 60 per cent weighting to fees.
Tim Murphy, Morningstar director manager research Asia-Pacific, says in the latest KiwiSaver report that 10-year returns for the sector closely matched asset allocation expectations. The average KiwiSaver growth fund returned almost 10 per cent per annum over the 10 years to March 31, Murphy says, followed by the slightly out-of-order aggressive options (9.5 per cent) while balanced (8.2 per cent), moderate (6.4 per cent), and conservative (5.8 per cent) funds performed to type.
During the shorter-term, KiwiSaver funds “generally reflected the underlying market conditions experienced over the March quarter as funds with larger exposures to defensive and domestic growth assets generally struggled over the three-month period”.
“The average multisector category returns ranged from negative 0.6% for the Conservative category to 3.0% for the Aggressive category,” he says.
Murphy says Morningstar also backed the Financial Markets Authority (FMA) in its recent decision to hose down advertising of ‘phenomenal’ fund manager returns incurred over the statistical outlier 12-month period.
“We recognise and agree with the FMA’s recent guidance to KiwiSaver providers on the inappropriateness of marketing shorter term time periods, like 12 month returns, as a means of attracting new prospective investors,” he says in the report. “Our KiwiSaver Survey provides a factual overview of what has been achieved to date, and as we have repeatedly reiterated every time we publish our quarterly KiwiSaver Survey, ‘it is most appropriate to evaluate performance of a KiwiSaver scheme by studying its long-term returns’.”
The FMA advertising clamp-down came as boutique Auckland-based manager NZ Funds published display ads boasting a 12-month KiwiSaver growth portfolio return of over 107 per cent.
Post the FMA order, NZ Funds has since amended the ads to show three-year returns for the KiwiSaver growth fund of over 25 per cent per annum with the tag-line: “Join the best performing KiwiSaver fund over the last 3 years.”
NZ Funds withdrew from the Morningstar KiwiSaver survey, which covers more than 90 per cent of the market by FUM, a couple of years ago.