Is your KiwiSaver strategy too conservative? The Morningstar June Quarter 2014 Survey confirms that New Zealanders’ retirement savings are being managed extremely conservatively. Currently 55.1% of KiwiSaver money is invested in conservative assets, mainly bonds and cash, compared with 55.5% a year ago.

Most of the media commentary on KiwiSaver focuses on fees, whereas we believe the most important issue is asset allocation. There should be far more emphasis on the risk and return characteristics of growth versus conservative assets, particularly as growth assets – mainly shares and property – should outperform conservative assets over the long term. This is the most important issue facing investors because KiwiSaver is a long-term scheme. Most investors have a long time horizon before they draw down on their investment, so risk can be taken in the form of asset allocation.

The median age of a KiwiSaver member is 35, making it a 30 year investment (assuming no first home withdrawal). So to have 55.1% of the money invested in conservative assets is not rational and if this does not change, New Zealanders will be poorer in retirement because of it.

The magic of compounding returns illustrates how slightly better annual returns will lead to considerably more money in retirement. For example, a 25 year old with a starting salary of $40,000 and annual wage growth of 3%, would end up with several hundred thousand dollars more in their KiwiSaver at retirement if they achieved net annual returns of 8% per year as opposed to net 5% returns per year.

Now this all sounds great, but how have shares, bonds and cash performed over the past 20 years?

Milford’s analysis shows that NZ shares have returned 7.71% per annum over this 20 year period, NZ bonds 6.49% and NZ cash 5.87%.

Past returns are not necessarily indicative of future returns, but a $10,000 initial investment over this period would have yielded the following returns;


Rate   of return




NZ Cash





NZ Govt Bonds





NZ Shares






Clearly, NZ shares have produced a much higher return on a pre-fees and pre-tax basis even through a bull run in the bond market. However, what is most important are returns after fees and tax. The difference between asset classes on an after fees and tax basis will be similar because although share funds charge higher fees, they are taxed more favourably.

Unfortunately, most of the media commentary misses the real story with KiwiSaver because they are focused only on fees. The most important issue for investors are their after fees and after tax returns. Investors can be confident that their after tax and after fees return will be higher over the long term if they invest in a well-diversified mix of high-quality productive growth assets.


Sean Donovan

KiwiSaver Associate