With the recent release of the new Sorted KiwiSaver Fund Finder (see the following blog post How is your KiwiSaver going?) several prominent commentators have been vociferous in their opinions that 'total fees are the most important factor' in choosing your KiwiSaver provider.
We totally disagree with this assertion. Having been practicing financial planners in New Zealand for more than 18 years, and having worked in the funds management industry in Australia and New Zealand for nearly 30 years, it is clear to us that there is little direct co-relation between the level of fees and the returns to Australasian investors.
There is a large body of theory and research from the larger markets like the USA which show that there is a co-relation with lower fee passive funds and higher returns. However, in the smaller markets that we work and invest in, and particularly in New Zealand, having a passive fund that 'clings to' or 'follows' an index, can end up with significantly lower results.
Our opinion is based on real life experience, and not on any academic research papers.
Why do we believe this is the case?
1. Limited market in New Zealand. The Benchmark Index of the New Zealand Stock Exchange is the NZX 50. It has an abundance of 'power companies' and has several large capitalisation stocks including the likes of Telecom. Therefore, the returns that you are going to get on a 'passive' low cost KiwiSaver fund that just 'clings to' or 'follows' this index is very dependent on the performance of certain sectors or certain companies.
2. You usually do get what you pay for. Some of the higher fee KiwiSaver funds are also higher returning funds. There are a number of reasons for the higher returns, so you need to make sure that you compare apples with apples. That if you are comparing a New Zealand Equities/Shares fund manager, that you make sure that the fund that you are comparing it with doesn't have Australian shares in it.
Some of the better performing New Zealand shares fund managers are Milford and Fisher, who have the highest fees, as they have performance fees.
3. Is this necessarily bad? Not in our opinion. If the actual return to you after fees is higher than other identical funds, then - why are higher fees bad? If higher fees are being paid and you aren't getting consistently good returns, then this is when you need to be questioning whether this is the best fund manager for you.
4. Why could the higher fees lead to higher returns? Quite simply, because the fund manager can afford to employ more and often better quality employees. Good funds management outcomes ARE directly related to having great people, good processes and good disciplines. Fund managers who have a high turnover of investment management employees, and who are continually changing their strategies tend to lack any consistency.
5. Consistency of good returns: For us at Moneyworks, consistency of good returns is far more important than an outstanding return one year and the lowest return the next year. The fund managers that we recommend and retain are those that are consistent from year to year. Now that we have 6 years of information, we can track this consistency with a good degree of certainty.
So how does this look in reality?
Probably the easiest way to show this information is to use the information for Balanced Funds to see whether the lowest fees give you the best returns after fees, and therefore, whether 'total fees is the most important feature in choosing your KiwiSaver manager' as claimed by some commentators.
We have taken the five year returns for the major Balanced Funds (Milford and Fisher are not present in the 5 year returns) from the Morningstar survey. These are after fees but before tax returns. We have compared these with the fees from the Sorted KiwiSaver Fund Finder information.
We have then sorted these by the highest per annum return for the last five years. As you can see, the lowest per annum return is the Smartshares fund. It also happens to be the lowest fee fund. Of course, it is not always the case that higher fees might mean better performance. As you can note, the Grosvenor fees are the highest on the table, and they have the second lowest returns.
|5 year return||Total fees|
|OneAnswer (ANZ Investments) Balanced KiwiSaver||7.70%||1.41%|
|ANZ Balanced KiwiSaver||7.50%||1.42%|
|Westpac Balanced KiwiSaver||7.10%||1.31%|
|Tower Balanced KiwiSaver||6.60%||1.63%|
|ASB Balanced KiwiSaver||6.30%||1.04%|
|Fidelity Balanced KiwiSaver||5.80%||1.57%|
|AMP Balanced KiwiSaver||5.40%||1.53%|
|Grosvenor Balanced KiwiSaver||5.20%||1.76%|
|Smartshares Balanced KiwiSaver||4.60%||0.80%|
The important message here is: There is far more to selecting your KiwiSaver fund than 'just looking at the total fees'. This is where the experience of a financial adviser comes in.
If you have any thoughts or opinions that you would like to share, visit us at our Twitter, Facebook or Linked In pages, and comment.
For more blog entries that you might be interested in:
By Carey Church
This website is operated by Moneyworks NZ Ltd and is not endorsed by, or affiliated with, the New Zealand government or Inland Revenue. Moneyworks NZ Ltd is using the KiwiSaver trade mark and logo under licence from Inland Revenue. To view the official New Zealand government KiwiSaver website, please click Here