A new study has failed to find any link between low fees and outperformance of KiwiSaver funds.
In fact, the analysis by Binu Paul, co-founder of online financial product comparison site, Pocketwise, shows even the worst-of-the-best KiwiSaver funds in the study period typically outperformed cheaper options – often by 1 per cent or more.
The Pocketwise study compared the five-year (or 10-year where available) rolling returns (after tax and fees) of 103 KiwiSaver diversified funds over six annual periods ending March 31 from 2013 to 2018.
Based on broad asset class weightings the analysis lumped the funds into three categories analogous to conservative, balanced and growth funds – including only the highest-performing 15 per cent funds and the cheapest 15 per cent of funds in the final analysis.
Cheap products only crossed over into the high-performance data on three occasions – for growth and balanced categories in 2013 and conservative in 2018 – and always at the bottom end of that scale.
The research shows the lowest-performing of the top 15 per cent funds outgunned the best cheap versions by close to 1 per cent or more on 11 of the 18 data points (three risk categories measured over six annual periods).
According to the study, the highest-performing KiwiSaver fund outperformed the lowest-returning comparative cheap product by margins ranging from 1.66 per cent to 6.15 per cent over the six-year analysis period.
Using tighter asset allocation ranges – which cut the sample down to 47 funds – cheaper funds only reached high-performance levels in two of the 18 occasions measured.
Paul said running the study using a June year-end data yielded similar results to the March figures.
However, he said the five-year return data was “arguably” insufficient to draw firm conclusions on KiwiSaver trends.
“We also looked at all the funds in each of the categories that have a full 10-year history,” Paul said in a statement. “Remarkably, even within that longer timeframe there was not a single instance where the cheapest 15% of funds featured in the list of highest performing 15% of funds.”
The study says given KiwiSaver has been operating in mostly benign market conditions the performance to date “does not provide any guidance on future direction of such trends”.
Paul said the study also excluded KiwiSaver funds without five-year histories, some of which offered low-fee options.
“With more and more pressure on providers to reduce fees, and with the launch of newer KiwiSaver funds with lower fee structures, it could mean that in future years the observed trends may change, but only time will tell,” he said in the release.
While the Pocketwise study found no correlation between high-performance and low fees in KiwiSaver, the report says investors do need to watch fund costs.
“Given that returns are not guaranteed, but fees are charged regardless of gains or losses in the fund, a higher fee is a guaranteed drag on returns,” the report says. “As such, it is a significant determinant of future savings balances. Paying more fees does not necessarily mean earning more from those funds.”
Pocketwise launched last year as an online financial product comparison site covering items such as KiwiSaver, mortgage and credit cards. The site will also soon add retail managed funds to the product suite.
Paul is also founder of online KiwiSaver comparison tool, SavvyKiwi.