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Default funds not for everyone

Q.           How do I find out if my KiwiSaver fund is performing well? I originally went into the AXA KiwiSaver Scheme because I had insurance with them. AXA KiwiSaver was taken over by AMP so I’m now in the AMP default fund. I don’t know how well they are doing or if it’s a good fund to be in. I am 43 so I could have over 20 years of saving ahead of me. 

A.            I am pleased you are asking these questions now rather than in 20 years’ time.   There are now 9 fund managers offering default KiwiSaver funds, an increase on the 6 that were first chosen when KiwiSaver was launched. The Government ran a tender process last year. A panel of evaluators chose the current 9 based on their organisational and investment capability, pricing levels and member education. 

These default fund managers have the advantage of a steady stream of new customers that they do not have to enlist by their own efforts. What do they have to provide in return? According to information from the Ministry of Business, Innovation and Employment they have to “deliver member education in the form of investment information to inform and educate default members on the KiwiSaver Scheme as a whole, as well as helping them make appropriate investment choices for their individual circumstances.”   They go on to say that: “The different default providers have proposed different approaches to member education, including proactive communication campaigns, seminars, financial advice and various online tools for members.”  

Of the 2.28 million KiwiSaver members, about 22% are still in default funds. These are all conservative. Most people are just too busy or have other things to worry about than what KiwiSaver scheme they are in. But if they are contributing regularly and building up a sizeable balance, they should invest some time learning more about it. 

How do you find the best fund for your individual circumstances? Either you talk to an authorised financial adviser, or you go to Sorted’s online Fundfinder tool. You can choose the ‘Check your current fund’ option and type in ‘AMP Default’. Fundfinder will show you the fees you are paying, the level of service provided and the average returns for this fund over the past 6 years. While the service is average and fees somewhat lower than average, the returns are simply dismal. The fund has achieved just 3.88% per annum compared with an average for the sector of 5.57% per annum. 

Why such an underperformer? Scroll down to the asset allocation and you will discover that this $1.2 billion fund holds a whopping 50% in cash. Why so much in low yielding cash? Apparently AMP has designed their default fund is a kind of ‘holding pen’ while members (all 149,565 of them) decide what type of fund will best suit their investment needs. The company has said “AMP is focused on helping to educate KiwiSaver members about the other types of funds that are available.” 

Given the large number still in this default fund, AMP’s efforts have not been spectacularly successful to date.   So back to the DIY option. Your next step is the FundFinder risk profile tool which asks 3 questions. This is the shortest risk profile questionnaire I have come across, but it does cut to the chase by identifying (a) your investment timeframe (b) your willingness to accept some losses along the way and (c) the range of ups and downs you think you can tolerate. Anyone with a timeframe of less than 4 years will be directed into conservative funds to avoid getting into a situation where your funds go down in value just as you want to spend them (this should include someone thinking about a First Home Withdrawal). Once you have narrowed down your search, you can then go to the ‘Compare Funds’ tab, and scroll through the appropriate funds which can be sorted by fees, service or returns. Fundfinder also provides useful information on the asset allocation, size of the fund and key staff. Then there is a link to the fund manager’s website where you can get more pertinent information such as the investment strategies and ultimately an investment statement with application form if you would like to join their scheme. 
Fundfinder reports that conservative funds have averaged 5.57%, balanced funds 7.68% and growth funds 9.41%. So those investors with a tolerance for risk and a longer timeframe who are still sitting in a default fund could find the ‘do nothing’ option costly.

Hawkes Bay Today 29 July 2014

Shelley Hanna is an Authorised Financial Adviser FSP12241. Her disclosure statement is available on request and free of charge by calling 870 3838. The information contained in this article is of a general nature and is not personalised. Send your KiwiSaver questions to shelley.hanna@peak.net.nz