Slow and steady wins the race
Q. Why are returns from KiwiSaver so low? You can double your money trading currency. Why don’t fund managers get better returns?
A. KiwiSaver is a retirement savings vehicle and fund managers have a mandate to invest our savings prudently. One way they do this is by diversifying across investments and asset classes.
It has been said that diversification is the only ‘free lunch’ in investing. A good fund manager will do thorough research into all the investments that make up their KiwiSaver portfolio and select investments that not only meet their criteria but also respond to different conditions – so that while one is lagging another will be doing well.
An important aspect of diversification is not only getting a wide spread of shares, but other asset classes as well such as bonds, property and currency too. They all have their part to play in the overall investment return. KiwiSaver fund managers may take currency positions within their portfolio to reduce risk but this is only a small portion of the portfolio.
Your KiwiSaver fund is probably made up of dozens if not hundreds of investments, providing huge diversification. Fund managers are constantly reviewing their portfolio weightings according to market movements, so the recipe for success today may look quite different to the recipe a year ago.
Currency trading and KiwiSaver are not natural bedfellows. Purely speculative investing such as currency trading is at the extreme edge of investment risk, and it is not appropriate for our long term retirement savings. It would be equally irresponsible for a KiwiSaver fund manager to invest entirely in the shares of one company, even if they were confident that the share price was likely to double over the next 12 months. It simply would not be an appropriate or prudent course of action.
All this talk about prudence begs the question, what happened during the global financial crisis? If fund managers had all exercised caution and prudence, surely the losses would not have been as great?
That may be true in some cases, but in fact much of the losses came from the mispricing of collateralised debt obligations or CDOs. Many of these CDOs were highly rated by ratings agencies such as Moodys and Standard & Poors – pressured by their clients (often big investment banks) into giving them a AAA rating when they should have been below investment grade. Fund managers rely on ratings as their mandate may allow only investments rated above say BBB- into their portfolio. The global financial crisis has resulted in tighter controls, more caution and scrutiny, to the benefit of investors.
And are KiwiSaver returns poor? Conservative funds have achieved an average return before tax of 6.2% per annum over the past 3 years while growth funds have done even better with 7.7% per annum before tax (source: www.morningstar.co.nz). In the current climate, these returns are impressive. Remember, any investment that is capable of doubling in value is also capable of halving in value so better safe than sorry where your nest egg is concerned.
Hawkes Bay Today 21 August 2012
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 intended to provide personalised advice. If readers have any KiwiSaver questions they would like answered please go to www.peak.net.nz or email shelley.hanna@peak.net.nz