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What We Did
This study examines the performance and benchmark asset allocation policy of 70 KiwiSaver funds categorised as growth, balanced or conservative over the period 2007- 2016. Using a unique hand-collected dataset of KiwiSaver asset allocation, Dr Dang of the UC Business School examines the sources for returns variability across time and returns variation among funds.
Overall, KiwiSaver funds underperformed their respective index benchmarks, with the average quarterly excess return (after management fees) varying between -0.15% and -0.83%. Variability of benchmark returns, on average, explains 43-78% of funds across time returns variability, and this is primarily due to fund’s investments in global capital markets. The study also finds that differences in benchmark asset allocation policies, on average, account for 18.8-39.3% of among-fund returns variation while the observed large ranges of fees for similar funds and the various extents of benchmark deviations may explain the rest. A published paper on this study has been selected as a Highly Commended Paper in the 2020 Emerald Literati Awards by the editorial team of Pacific Accounting Review Journal.
Who Was Involved
The project received a scholarship funded by UC Foundation and College of Business and Law Research Committee.
Why It Matters
This study raises concerns about the poor after-fee benchmark-adjusted performance of KiwiSaver funds and the semi-active investment strategy widely used by balanced and growth fund managers. Security selection creates high costs, and the resulting high fees hurt fund performance. The dear costs of benchmark deviations will expose investors to retirement income inadequacy in the long term. Further, the dominance of global equities in KiwiSaver’s assets is not optimal given the double tax policy and the high management fees paid to overseas managers.
The study suggests that investors should not consider a fund’s label as a proxy for the degree of risk inherent in a scheme. Instead of enrolling in a default scheme, investors should be selective of their retirement savings scheme. They should review the reported top ten holdings and the benchmark asset allocation policy (investment style) of each fund carefully. When comparing funds to make investment decisions, investors should examine benchmark-adjusted performance (instead of the absolute return) and pay attention to the degree of active management and the expense ratio. Investors should be mindful of the excessive fees charged and should make use of the KiwiSaver fee tracker tools provided by the FMA and the Commission for Financial Capability. They should not chase past performance.
The FMA should require disclosures of a fund’s expense ratio, returns volatility and benchmark-adjusted performance measures. This will help improve the transparency and competitiveness among KiwiSaver providers and raise the degree of financial literacy among investors.
Learn More
- Dang, H. D. (2019). KiwiSaver fund performance and asset allocation policy. Pacific Accounting Review 31(2), pp. 232-257
- https://www.emerald.com/insight/content/doi/10.1108/PAR-06-2018-0044/full/html
