The latest Reserve Bank managed fund statistics reinforce two important features of our investment markets.

The first is that New Zealand investors, particularly KiwiSaver members, are extremely conservative, and the second is that the small size of the domestic sharemarket is forcing more and more money overseas.

At the end of last year, New Zealanders had $91.1 billion invested through managed funds, a 12.5 per cent increase over the $81 billion held at the end of 2012.

KiwiSaver had $20 billion, or 21.9 per cent of the latest figures, compared with $15.4 billion or 19 per cent at the end of 2012.

At the end of 2008, total managed funds were $60.3 billion, of which KiwiSaver had $2.2 billion, or 3.6 per cent of the total.

The growth in KiwiSaver has been phenomenal, but the asset allocation of these savings is far too cautious.

Asset allocation is the percentage allocated to growth assets, mainly shares, and the proportion invested in income assets, mainly cash and bonds.

The asset allocation decision accounts for 70 per cent to 80 per cent of investment returns.

Thus, it is far more important to determine what percentage of a portfolio should be invested in growth or income assets rather than deciding on the individual securities.

Over the longer term, growth assets should deliver higher returns, so investors with a long-term horizon should have a strong bias towards shares and other riskier assets.

The New Zealand Superannuation Fund is a good example of this.

It was established “to reduce the tax burden on future New Zealand taxpayers of the cost of New Zealand Superannuation”, and has a long-term investment strategy because the first withdrawals from the fund will not occur until 2029/30.

Any fund with a 15- or 20-year plus horizon should adopt a long-term investment strategy.

This approach should apply to most KiwiSaver investors who are 15 years or more away from the retirement age of 65.

The New Zealand Superannuation Fund sums up its position by saying: “The long-term purpose and mandate of the fund mean that it should be weighted toward growth assets to have the best chance of achieving its performance goals.”

This is clearly not the case for KiwiSaver members, because the median age of the scheme’s 2,283,900 members is 35, yet the managed funds statistics show they have a strong bias towards income assets.

The Super Fund had a 77 per cent allocation to growth assets at the end of last year, only 11 per cent in income assets and 12 per cent in property and infrastructure.

(Property and infrastructure are treated as a separate asset class in this analysis because they have growth and income characteristics.)

KiwiSaver investors had only 42 per cent allocated to growth assets, an amazing 55 per cent in bonds and cash and 3 per cent in property.

These Reserve Bank statistics are consistent with the KiwiSaver asset allocation figures in the latest Morningstar KiwiSaver Survey.

The KiwiSaver bias towards income assets is because of several factors.

These include the strong position of the conservative default funds, older KiwiSaver members being haunted by their experience of the sharemarket in the 1980s, younger members taking a cautious approach because of the first-home withdrawal facility, many investors having a low level of financial literacy, and the reduction in the number of financial advisers caused by increased regulation and education requirements.

Our conservative approach towards KiwiSaver allocation is an enormous wasted opportunity, particularly if growth funds continue to outperform income funds over an extended time.

Morningstar figures show growth funds achieved a return of 10 per cent a year over the past five years compared with 6.3 per cent by conservative funds – which include the five large default funds.

A $10,000 investment in these funds over 30 years – which is the time horizon of the median KiwiSaver member – would have these outcomes (after fees but before tax):

•The average growth fund, which has 74 per cent allocated to growth assets according to Morningstar, would be worth $174,500 at the end of the 30-year period after a 10 per cent annual return.

•The average conservative fund, which has only 21 per cent allocated to growth assets, would be worth just $62,500 after a 6.3 per cent annual return.

This simple example shows the huge difference between annualised returns of 10 per cent and 6.3 per cent over a long period of time.

The difference is even more marked when tax is taken into account because income assets are more heavily taxed than growth assets, mainly because New Zealand growth assets are exempt from capital gains and many domestic companies pay fully imputed dividends.

Interest income, which is the main source of returns for income funds, is fully taxed.

One of the staggering features of KiwiSaver is that investors are becoming more, rather than less, cautious.

In June 2010, when the benchmark NZX50 Gross Index was 42 per cent lower than it was this week, KiwiSaver investors had 43 per cent allocated to growth assets compared with 42 per cent at the end of last year.

This is a totally irrational development, particularly when one considers how well growth assets have performed since mid-2010.

Non-KiwiSaver managed funds have a 46 per cent allocation to growth assets, 51 per cent to income assets and 3 per cent in property.

The allocation to growth assets is relatively low although non-KiwiSaver investors are probably older, on average, than KiwiSaver members.

The other feature of managed funds and the NZ Superannuation Fund is the large amount allocated to overseas investments.

Finance Minister Bill English wrote to the Guardians of the Super Fund in May 2009 telling them: “It is the Government’s expectation, in relation to the fund’s performance, that opportunities that would enable the Guardians to increase the allocation of New Zealand assets in the fund should be appropriately identified and considered by the Guardians.”

This was consistent with National Party policy that the Super Fund should eventually have 40 per cent of its portfolio invested in New Zealand.

The Super Fund’s investment in New Zealand has fallen from 24 per cent to 17 per cent since the letter.

Non-KiwiSaver funds have 55 per cent allocated to New Zealand assets and KiwiSaver portfolios 48 per cent.

Australian superannuation funds have 81 per cent invested in domestic assets and the country’s Future Fund, the equivalent of our Super Fund, has 31 per cent invested in Australia.

Our investment funds have a low – and declining – proportion invested in New Zealand because of limited opportunities.

The NZX is tiny and will remain so until our business community becomes more ambitious and takes advantage of the huge build-up in available capital through the Super Fund, KiwiSaver and non-KiwiSaver managed funds.

This capital is a huge opportunity for New Zealand businesses but it is not being used because the sector has a fear of failure and an unwillingness to subject itself to the scrutiny of public markets.

It is vitally important that we get more stock exchange listings because this would help kill two birds with one stone.

It should encourage managed funds investors, particularly KiwiSaver members, to switch from income to growth assets, and should also keep a higher proportion of these funds invested in New Zealand.

Brian Gaynor is the portfolio manager of the Milford Active Growth Fund and Milford Active Growth KiwiSaver Fund.

Asset Allocation; KiwiSaver investors far too cautious

Asset Allocation

NZ Super Fund



















New Zealand/Offshore

    New Zealand
















Total ($billion)




Figures as at December 31, 2013