A review of KiwiSaver Balanced Funds, which are soon to become the Default Option, highlights:
- A heavy reliance on equities to drive return outcomes – there are few return engines outside of equities.
- Limited portfolio diversification – likely resulting in higher levels of portfolio volatility across a full market cycle (which could be dampened down for the benefit of investors).
- A high allocation to Fixed Income – which is a concern in the current market environment.
By comparison, Australian Super Funds with similar return objectives to a KiwiSaver Balance Fund have lower allocations to equities despite having higher “growth” asset allocations. They achieve this by having higher weightings to alternative investment strategies such as Private Equity, Direct Property, Unlisted Infrastructure, Commodities, and Diversified Multi-asset Funds.
Consequently, the Australian Super Funds have lower weights to fixed income relative to their Kiwi peers. There are some nuances amongst asset class allocations of the KiwiSaver Balance Funds, these are similar to those identified from the KiwiSaver Conservative Fund analysis.
I think it is fair to say that New Zealand KiwiSaver Funds need greater levels of diversification.
Often liquidity is sighted as a reason for not investing into alternative investment strategies, to this point:
- Portfolios often overestimate the level of liquidity they require (see here); and
- There are ways of increasing portfolio diversification with more liquid investment options.
Fees may also be playing a part. Let us hope not, particularly in considering the best outcomes for customers.
The high allocation to fixed income is also a concern, particularly at this juncture in the economic and market cycles.
Fixed Income was recently described as a “slow moving train wreck” at a recent industry event in New Zealand, Heathcote Investment Partners’ Meet the Manager series, see Toot, toot: what to do when bonds go off the rails | Investment News NZ
The traditional roles of Fixed Income are likely to be challenged in the years ahead:
- Returns are highly likely to be lower than those delivered from fixed income over the last 10-20 years; and
- The risk mitigation characteristics of fixed income are also likely to be lower in the years ahead.
Purely from a risk management perspective, Kiwi investors should be looking to increase the genuine level of diversification within their portfolios – by lessening the role of equities and exploring investment options to substitute/complement fixed income allocations.
Personally, I am not convinced of moving the KiwiSaver Default Fund to a Balanced Fund option is the right solution. My views can be found here. It is clearly ridiculous to have a 20- and 55-year-old Default KiwiSaver investor in the same investment strategy.
My preference would be for Target Date / Life Cycle / Life Stage type funds as the Default Options – these align more with the financial planning theory. The criticism of these type of Funds is often incorrectly positioned, I provide a defense of Target Date Funds here.
Analysis of KiwiSaver Balanced Funds
The Table below provides average, min, and max allocations of the Strategic Asset Allocations (SSA) for 12 KiwiSaver providers, sourced from their latest Statements of Investment Policy and Objectives (SIPO).
Most of these managers are currently Default KiwiSaver Providers.
|NZ Equities||International |
From a top level, the managers are tightly grouped around 40% allocation to Income assets (Cash, NZ Fixed Income and International Bonds).
A KiwiSaver Balanced Fund is very much the traditional 60/40 portfolio (60% Equities / 40% Fixed Income).
There is one Manager that is an outliner, a truly “Balanced” Fund of 50% Equities and 50% Fixed Income. There is significant peer risk here and with no published return objective it is not possible to assess the appropriateness of its SAA. Albeit they will likely be the best performing manager when global sharemarkets fall sharply. However, over the longer term they are likely to struggle in keeping up with peers.
Within Income Assets
The variation within the Income Assets is consistent with analysis undertaken on the KiwiSaver Conservative Funds, see analysis here, which also includes a review of the risk drivers within Fixed Income, particularly likely variation in duration exposure.
As would be expected, the Growth Allocation is reasonably tight around 40%, the flip side of the Income Allocation.
Listed equities, including New Zealand equities, international equities, and listed property and infrastructure dominate the growth allocations i.e. there are very little investments into Alternatives. See Tables below.
Of interest, on average Domestic Equities (New Zealand and Australia) make up around 36% of the core equities allocations within the KiwiSaver Funds e.g. domestic and international listed equities ex listed property and infrastructure combined.
Overall, core equities make up 52% of a Fund on average. This is by far the dominant risk within these portfolios. On a risk basis, the equities allocations contribute to over 90% of the risks within a “Balanced” portfolio.
|Ratio of |
The remaining growth allocations are predominately made up of listed Property and listed Infrastructure, with smaller allocations to alternatives. Direct Property dominates the alternative allocations, with smaller allocations to private equity and more liquid hedge fund type strategies.
|Total Listed Equities|
|Alternatives Allocation||Alternatives share of |
Below is the same Data for a broad selection of Australian “Balanced” Funds.
|Ratio of |
|Total Listed Equities |
|Alternatives Allocation||Alternatives share of |
Australian “Balanced” Funds have an 80% allocation to Growth assets but a lower allocation to Core Equities (Australian and International Equities) than their New Zealand counterparts, 48.5% versus 51.9% on average for the Kiwi Funds.
This reflects that the Australian Funds have a higher allocation to Alternatives, which includes investment into Private Equity, Direct Property, Infrastructure, Commodities, and Diversified Multi-asset Funds.
Diversified Multi-Asset Funds
It should be noted that Diversified Multi-Asset Funds can have high allocations to listed equities, therefore some funds have a higher allocation to equities than appears based on sector allocations alone.
Diversified Multi-Asset funds offer “genuine diversification” relative to a traditional balanced fund and are more actively managed. In addition to investing in the traditional asset classes of equities and fixed income, they also invest into an array of alternative assets, often in more specialised areas and situations. These Funds seek breadth and depth across asset classes seeking to allocate to different return engines e.g. specialist areas of the health care industry, housing within property, renewable energy, and specialised credit opportunities.
Diversified Multi-Asset Funds offer an authentic option to increase diversification within a traditional portfolio, particularly for those investors who have constraints in relation to fees and liquidity.
There are several well-resourced managers in Australia with long histories of adding value with these types of funds.
Is it Apples vs Apples?
There is a wide variation in the Growth/Income split between New Zealand and Australian “Balanced” Funds.
Across both risk categories of Conservative and Balanced Funds, although the Australian Funds have higher Growth allocations than the Kiwi Funds, they have a slightly lower allocation to equities.
The difference is a lower allocation to fixed income and a higher alternative allocation in Australia. The portfolios are more diversified in Australia, this allows them to have a “higher” growth allocation. They are also most likely better positioned for the years ahead given the current stage in the economic and fixed income market cycles.
Although there is a degree of uniformity amongst the Kiwi Funds, you cannot choose a Fund by its name alone.
A review of the return objectives for both the New Zealand and Australian reveals:
- The Australian Funds have return objective of CPI + 3% on average, they range from 2.5% to 4%.
- The New Zealand Funds by and large fail to publish return objectives, those that do range from 2.5% – 3%.
This indicates that the universe of Funds is not too dissimilar from a return objective perspective, and the analysis above provides some real insights for consideration and to ask why the difference?
Personally, I think all managers should publish their return objectives in a CPI+ format. This is a valuable piece of information for the informed investor along with a Fund’s proposed risk category.
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