Cautious banks win – but investors are losing

The new periodic disclosure regulations, which should have been introduced years ago, give us a deeper insight into KiwiSaver funds, particularly their performance, fees and investment strategies.

The new statements reveal that the banks have slam dunked traditional fund management companies in the battle for KiwiSaver funds under management.

This is great news for their shareholders, who are mainly Australians.

But we have to look at the issue in more detail to determine whether it is in the best interest of New Zealand savers, particularly KiwiSaver members who want to maximise the size of their retirement fund.

The five major banks, ANZ, ASB, BNZ, Kiwibank and Westpac, have $11,299 million of KiwiSaver money, or 63 per cent of the total funds under management.

Just over 77 per cent of KiwiSaver cash is managed by overseas-owned companies.

The five banks have increased their KiwiSaver market share from less than 50 per cent at the end of 2009 because of their powerful distribution capabilities and the acquisition of Gareth Morgan Investments by Kiwibank.

The periodic disclosures also confirm that the banks are heavily weighted towards low-risk conservative funds while the non-banks have a strong bias towards growth and balanced funds.

These orientations can not be attributed to management of the five default funds because the non-bank default funds – AMP Default, Mercer Conservative and Tower Cash Enhanced (now managed by Fisher Fund) – have $2370 million under management, whereas the two bank-run default funds, the ASB Conservative Fund and ANZ Conservative Fund, have $2483 million.

Large Australasian trading banks usually have a low-risk culture, and it is not surprising they have a higher concentration of conservative KiwiSaver funds.

Different skills are required to manage cash, fixed interest securities and equities, yet under the “key personnel” section of the periodic disclosure statement – which shows “the directors and employees who have most influence on the investment decisions of the fund” – many of the banks list the same people whether it is a cash, conservative, balanced or growth fund.

Most specialist investment managers would have different individuals influencing funds as they move up and down the risk curve.

It is disappointing that 27 per cent of all KiwiSaver money is invested in the five conservative default funds because they have had an average annual return of only 3.6 per cent since inception on October 1, 2007. These figures are after fees and tax.

The 642,680 individuals who have invested in these default funds will have a disappointingly low KiwiSaver balance when they reach 65 unless they adopt a more adventurous approach.

ASB, the second largest KiwiSaver manager, has a particularly large bias towards conservative funds and has very little invested in growth funds.

It could be argued that ASB investors have made the correct decision because the ASB Conservative Default Fund has had an annual return of 3.3 per cent since its inception six years ago compared with 2.7 per cent for its Moderate Fund and NZ Cash Fund, 1.8 per cent for the Balanced Fund and only 0.8 per cent for its Growth Fund.

But this is not the way to look at KiwiSaver as contributions usually flow in on a regular basis and a fund’s performance in later years will have a much bigger effect on the amount of money that individual members will have when they reach 65.

With this in mind, it is worth noting that in the latest 12-month period, ASB’s Conservative Default Fund had a return of 4.4 per cent, its Moderate Fund 7.2 per cent, Cash Fund 2.2 per cent, Balanced Fund 10.8 per cent and Growth Fund 14.4 per cent.

So if ASB’s KiwiSaver fund performances are weighted according to the amount of money invested over the six years, the Growth Fund would probably have had the highest return in dollar terms even though its Conservative Default Fund has produced the higher average annual return.

It should also be noted that ASB has low fees, mainly because it takes a passive approach towards investing. For example, its annual fees vary from 0.34 per cent on its NZ Cash Fund to 0.38 per cent for the Conservative Default Fund and 0.66 per cent for the Growth Fund.

The other difference between the bank and non-bank sectors is the amount of money the bank-managed KiwiSaver funds have deposited with their parent companies.

This gives the banks a huge advantage because they can earn good margins on any KiwiSaver money that is then on-lent by the parent company to its customers.

For instance, the largest investment of the BNZ Growth Fund is a “BNZ Treasury Call Account”, and its third largest investment is a “BNZ on call bank account”.

BNZ is well behind its competitors, with $111 million in KiwiSaver funds, because it entered the KiwiSaver market only this year.

One of the issues facing KiwiSaver investors is how the banks will respond when individuals inevitably want to move to higher risk growth funds while the banks have a more natural orientation towards managing low-risk funds.

The move from conservative to balanced to growth funds has been evident overseas as investors become more financially literate, their investment funds grow and they become more comfortable with the short term volatility associated with growth assets.

ANZ is in a relatively strong position because its owns 100 per cent of fund manager OnePath (NZ) which recently changed its name to ANZ New Zealand Investments.

Kiwibank also anticipated the inevitable move to more risk-orientated funds when it bought Gareth Morgan Investments last year.

The difference between the Kiwibank and Gareth Morgan schemes, neither of which manages a default fund, clearly shows how banks attract investors who want the low risk conservative approach whereas non-banks attract investors with a higher risk profile.

Kiwibank, which closed its own KiwiSaver funds to new members last December, has 49.8 per cent of its funds in conservative funds, 31.5 per cent in balanced funds and only 18.7 per cent in its growth funds.

GMI has only 15.4 per cent of its KiwiSaver money in conservative funds, 48.6 per cent in its Balanced Fund and 36.0 in the Growth Fund.

This year Fisher Funds acquired Tower Investments and TSB Bank subsequently acquired a 26.4 per cent interest in Fisher.

This was an astute move by TSB Bank, but extremely disappointing for Tower shareholders because its investment management business was in an ideal situation to capture KiwiSaver funds as they moved up the risk scale from conservative to balanced to growth funds.

The banks, which are in a strong position to increase their dominance of the KiwiSaver market, will be challenged by the move to more high-risk funds.

The worst thing they could do, as far as most New Zealand investors are concerned, would be to try to convince KiwiSaver members to stick with their conservative funds.

KiwiSaver; Dominated by banks and conservative funds

Source: Morningstar & Milford Asset Management

Brian Gaynor

Portfolio Manager