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KiwiSaver – Passive, Active & fees?

Recently I put my nose into the debate around passive versus active investing. In my comment on the article I pondered why the choice should be so binary, one or the other? In my observation of investments, the prudent path always seems to be one of diversification. The old euphemism of not having ‘all your eggs in one basket’ is well understood. So, diversification can be across asset classes, specialised investment products and geographical markets.

How does this affect your choice of KiwiSaver? We can only choose one fund. As far as KiwiSaver is concerned, we must put all our eggs in the one-fund-basket.


  • The birth of KiwiSaver
  • How do you diversify your risk within the one fund of your KiwiSaver?
  • Passive vs Active & fees
  • Is your 3+3 contribution enough?

Born during the Great Recession, or the GFC, whichever Doom-spelled description that you want to use, KiwiSaver has just had its 13th birthday. Happy Birthday KS. What a life! The markets were low and then had the longest bull run, culminating in COVID’s dramatic entrance earlier this year.

Essentially, the market was so strong, all KiwiSaver providers could demonstrate ‘good’ growth = after all a rising tide lifts all boats.

However economic cycles are usually around 7-10 years, not the 13 years of the recent cycle. What happens from this point on? Will those rising stars still shine?

 How do you diversify your risk within the one fund of your KiwiSaver?

It is easy to get bamboozled into thinking there are basically three types of fund; low risk (conservative), moderate risk (balanced) and high risk (growth). Your diversification happens within that. Not too much choice. All providers are basically the same, right…? Wrong.

A review by the FMA in 2015 showed that only 3 out of 1000 people with KiwiSaver got advice about their investment. This may have improved a little in the last 5 years, but it is still poor. With the regulatory changes due in March 2021, this lack of client advice will be under the microscope. My issue here is that if clients are not getting advice on the fund decisions they make, that can end up costing them tens of thousands of dollars as they near retirement and potentially exit KiwiSaver.

Just as importantly is people’s requirement for the mix within their fund. Their needs change over time, therefore the asset allocation (between the typical low risk, moderate risk and high risk assets) changes as they get older. If only 3 in 1000 are getting advice, how do they know when or if they should ‘rebalance’ their own portfolio?

Out of the 30 schemes offered to New Zealanders to meet their retirement objectives, only nine have lifecycle options. This type of fund automatically rebalances your allocation as you age, ensuring the best return and fit-for-purpose depending on your stage in life. Of these 9, only one scheme (NZ Funds KiwiSaver Scheme) offers a waterfall asset allocation that ensures clients are rebalanced every twelve months for their lifetime.

Each fund provider will invest in a range of assets and markets. A good financial adviser will help you to understand how diverse that portfolio is, and if that meets your requirements. Remember those eggs? Spread them far and wide. Why? Because as we have recently seen with the COVID market scares, different stocks, assets and markets react to the same information differently.

Passive vs Active & the fees you’ll pay

KiwiSaver is not designed to be short-term speculative investment. You are potentially investing for decades. You will have market Bulls and Bears, economic growth and recessions. Markets and economies are not uniform and ordered.

Passive investing will choose a ‘strategic stock’ or index and hold for three decades, limiting active management, thereby allowing for lower fees, because there is less work to do.

For active managers, the ability to be dynamic within the market and economic conditions allows the manager to respond to changes with speed. They do so while still being focused on the long-term target asset allocations for each fund.

And thus, we have the birth of the KiwiSaver ‘active-passive’ debate.

Many commentators suggest aiming for the lowest fees. And with good reason. Excessive fees can chew up a fair chunk of change when compounded over time. Just going for the lowest fees may sound worthy, but if your diversification is limited, then potentially you are over exposed into certain markets or assets. That means that your eggs are bunched in just a few baskets. Lower fees, yes, higher returns in the short-term as the markets rise, yes, but potentially with long term consequences. However, research generally covered only a 10-year period of the bull market, not the 2-3 decades that most KiwiSaver investors will enjoy.

When I think about financial risk management, there is the upside of course: which baskets are you putting your eggs in, which markets etc. However, what about the downside? We know everything is cyclical, so how do you ‘insure’ against a downturn, such as the one we’ve just experienced? If you are in a passive fund, there is not much that can be done. The index goes up, you smile. The index goes down, you frown. Active management assumes (using the dynamic approach mentioned earlier) that your insurance policy is activated when things go south. In finance that is done with hedging, effectively profiting from price declines. As with any insurance, it costs a premium to take a position of risk.

Suddenly the idea of paying a fee makes a little more sense. You are not just paying for the upside management (and bullish quarterly returns), but you are also paying for the downside risk management, and in fact you are also paying for the ‘insurance’ on that downside, the hedging vehicle. If you have KiwiSaver for 2-3 decades, you are likely to see at least 2-3 downturns. Do you want to have an insurance policy in place for that, or not? Active management of your KiwiSaver can provide that insurance policy.

Ultimately, you get what you pay for. There are several no-frills KiwiSaver funds offering low rates. And that is good. They are servicing part of the market that wants that. There are also other providers that provide solid downside mitigation while actively diversifying your risks across assets, markets and geographies.

Is your 3+3 contribution enough?

My wife and I arrived in NZ from Melbourne in 2004 where we were used to contributing 9% to Superannuation. At the time, NZ did not have KiwiSaver, yet the discussion was already running hot about the pros and cons. I am still baffled by the fact that anyone thinks that 3%+3% will be enough to retire on – 3% from you and another 3% from your employer. The numbers just don’t stack up.

A report by MyFiduciary showed that if you wanted to retire at 70% of your pre-retirement income, you would need to contribute at a rate higher than the default 3% employee and 3% employer rate. This report assumed you still receive National Superannuation at age 65 onwards. [NZFUNDs – Where does the money go? – May 2020]. A challenge right now is that the NZ Government has taken on huge debt in trying to manage their COVID response. This debt is going to put pressure on future governments. Superannuation spending accounts for nearly 40% of the Government’s spending currently. With an aging population, that number is going to become tough to continue.

The retirement commission is known to have said that retirement planning can be thought of as the “three-legged” stool. The ‘legs’ of the stool are Kiwisaver, NZ Super and ‘other’ assets. How does that stool stand if the NZ Super is not there to help in the future? Many people I speak with do not even have ‘other assets’, so now we are left with a one-legged stool for our population’s retirement.

That sounds a little risky.

There are other products that people can use, other managed funds that work as ‘unlocked’ KiwiSaver vehicles. Throw in an additional 3% with one of these investment products and at least you are now you are investing 3%+3%+3% (of which one of these is from your employer) for your retirement. Maybe that 9% isn’t the right choice for you, maybe an unlocked KiwiSaver isn’t right either.

Regardless, seek some investment advice from a professional adviser. Get some knowledge so that you can decide what type of retirement and investing plan you want. Not all KiwiSaver schemes are created equally. Fees and quarterly returns maybe important, however, your long-term financial planning may require a little more thought.

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