This is a great article by Stuff outlining the KiwiSaver risk ladder, rung by rung.
However, what struck me is that there is a rung missing on the KiwiSaver ladder.
That rung being the lack of exposure to non-traditional investments, such as Alternatives, including liquid alternatives, hedge funds, Private Equity, Venture Capital, and investments into Direct Property and unlisted infrastructure.
Based on the Stuff article, there is just 1% within all of the KiwiSaver Funds invested outside of Cash, Fixed Interest (bonds), and Equities (the traditional asset classes).
We don’t have to look far to see how much of anomaly this.
By way of comparison, the Australian Pension Fund Industry, which is the fourth largest Pension market in the world, invests 22.0% into non-traditional assets.
As can be seen in the Table below, Australian Pension Funds, which manages A$2.9 trillion, invests 22.0% into non-traditional assets, meanwhile KiwiSaver has 1% invested outside of the traditional assets. (KiwiSaver Total Assets are just over $50 billion).
|Allocations to broad asset classes||
Aussie Pension Funds
|Cash and Fixed Interest (bonds)||
|Other / non-traditional assets||
As recently reported by Bloomberg, allocations to non-traditional assets is expected to continue in Australia ”with stocks and bonds moving higher together, investors are searching for other areas to diversify their investments to hedge against the fragile global economic outlook. For the world’s fourth largest pension pot, that could mean more flows into alternatives — away from the almost 80% that currently sits in equities, bonds or cash.”
The increased allocations to Alternative is a global trend, which is not just in response to current market conditions.
As outlined in a previous Post, Preqin a specialist global researcher of the Alternative investment universe and provide a reliable source of data and insights into alternative assets professionals around the world, expect Alternatives to make up a larger share of investment assets in the future.
Preqin’s estimates are staggering:
- By 2023 Preqin estimate that global assets under management of the Alternatives industry will be $14tn (+59% vs. 2017);
- There will be 34,000 fund management firms active globally (+21% vs. 2018). This is an issue from the perspective of capacity and ability to deliver superior returns – manager selection will be critical.
The expected growth in Alternative investments was also highlighted by a recent CAIA Association Survey, which outlined the drivers of this expected growth and likely trends.
Globally the trend toward increasing allocations to non-traditional assets has been in play for some time. As one of my first Posts notes, the case for adding alternatives to a traditional portfolio is strong.
This Post highlights that the movement toward Alternatives and non-traditional assets is not revolutionary nor radical, it is seen globally as evolutionary, a natural progression toward building more robust Portfolios that can better weather sharp falls in global sharemarkets.
Interestingly, the US Department of Labor (DOL) recently provided guidance that US Defined Contribution retirement plans can invest into certain Private Equity strategies, where previously there had been a hesitation to do so.
The DOL emphasised this would be of benefit to “ordinary investors”.
Being more specific about Alternatives, Prequin note investor’s motivation for investing in alternatives are quite distinctive:
- Private equity and venture capital = high absolute and risk-adjusted returns
- Infrastructure and real estate = an inflation hedge and reliable income stream
- Private debt = high risk-adjusted returns and an income stream
- Hedge Funds = diversification and low correlation with other asset classes
- Natural Resources = diversification and low correlation with other asset classes
Therefore, motives to investing in alternatives range from enhancing returns (Private Equity) and reducing risk through better diversification (Hedge Funds) and hedging against inflation (infrastructure and real estate (property), high exposures to non-traditional assets have benefited Endowments and foundations for many years.
So the Question needs to be asked, why do KiwiSaver Funds not invest more into non-traditional assets? Particularly, when globally the trend is to invest in such assets is well established and further growth is expected, while the benefits are well documented.
Therefore, KiwiSaver Investors are potentially missing out. Their portfolios could be a lot more robust and better diversified. The risks within their portfolios could be reduced without jeopardising their long-term investment objectives.
Please see my Disclosure Statement