Despite an inauspicious launch date, the first 10 years of KiwiSaver has seen investors benefit from an almost perfect series of fortunate events, according to a new analysis by consultancy firm Melville Jessup Weaver (MJW).
But with more at stake now, KiwiSaver members should ensure their risk exposures match their investment horizons, the MJW report says.
Included in the latest MJW quarterly investment survey, the study shows the pattern of 10-year returns – marked by an immediate crash in the wake of the global financial crisis (GFC) followed by a virtually unbroken run of positive markets – coincided with rising KiwiSaver balances to super-charge returns for growth investors.
Based on idealised scenarios, the MJW analysis shows the typical KiwiSaver member invested in growth funds since the regime began late in 2007 would’ve been about $10,000 better off than their conservative-minded peers over the same period.
By the end of September 2017 market returns alone combined with monthly contributions of $250 per month would’ve resulted in growth investors accumulating $50,000 compared to just under $40,000 for conservative KiwiSaver members, the MJW report says.
However, the study says the outperformance of more aggressive KiwiSaver portfolios only came to the fore in the last couple of years as booming share markets acted on fatter account balances – an example of positive “sequencing risk”.
“Sequencing risk recognises that the sequence in which returns occur is crucial to the outcome received by regular savers,” the MJW report says. “Here, history has worked out favourably, with better returns being received later, when more money was invested.”
Reversing the return series with a GFC-like crash starting in early 2016, though, would’ve seen conservative KiwiSaver members ahead after 10 years with savings of $37,100 (versus $39,100 based on actual returns).
Under the reversed scenario, the idealised KiwiSaver growth investor would’ve accumulated just $32,700 by the end of September 2017 compared to almost $50,000 as per the real return series – a difference of almost 35 per cent.
“This analysis shows the importance that the sequence of returns has on the final balance,” the MJW study says. “It suggests that the next crisis – even if it is of a similar magnitude to the GFC – could have a larger impact on KiwiSaver participants in dollar terms since they now have more funds at risk.”
But rather than signaling a broad-scale portfolio de-risking, the MJW analysis “emphasises the importance of understanding one’s time horizon and investing appropriately”.
Meanwhile, short-term effects showed up in the MJW data for NZ equity manager returns with a wide divergence between best- and worst-performer over the September quarter.
Ben Trollip, MJW partner, said the gap between the top quarterly returns (Castle Point’s Trans-Tasman fund with 10.1 per cent) and Devon’s NZ Core fund’s low score of 2.1 per cent was probably the widest on record.
“I can’t remember seeing such a wide spread.” Trollip said.
He said the vast majority of NZ manager results over the quarter and year were determined by relative positions in a2 Milk, which has surged by about 60 per cent during the annual period.