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Switching your KiwiSaver - is now a good time?
By Amanda Morrall
2022 was a turbulent year for investors. Globally, share markets fell by over 15%, while here in New Zealand KiwiSaver funds fell on average 6% to 10% over 12 months. The big question on everyone’s mind now is what will 2023 bring? Are things going to improve, will it be more of the same, or could it get worse? And what should I do?
Anyone considering switching their KiwiSaver plan to another fund manager is understandably concerned about timing. Is now the right time? Could I lose more money? How do I avoid locking in any losses?
Fees and Returns
When it comes to our finances, most people need at least one very good reason to trust a company with their money. We call this a Reason To Believe (or in fancy marketing acronyms, the ‘RTB’).
In the highly competitive KiwiSaver space, customers have traditionally been sold on two main RTBs: fees, and returns. Low fees and high returns are naturally compelling reasons to believe, given there are long-term benefits to both, especially in KiwiSaver - a long-term, compounding investment.
The compounded effect of fees charged to your account over long periods of time can really add up. So do returns, and over a lifetime of saving, the higher the better. Unlike fees, which tend to be consistent, returns are variable and totally unpredictable. Investment markets are inherently volatile. They go up and down. But over time, they historically march in an overall upward direction. It’s why we invest, and why we are encouraged to hold the course and not move in and out of markets like a surfer looking for the next gnarly wave.
But that volatility is also why you’ll often see disclosed, “Past performance is no guarantee of future returns.” Just because this year’s rockstar fund manager nailed it, doesn’t mean that they can keep up the momentum year after year after year (something that’s well documented in investment markets reports - SPIVA being an example of fund reporting provided by S&P Global).
A few years ago, the Financial Markets Authority (FMA) cracked down on fund managers taking too much license with return projections, concerned that consumers might be misled by unrealistic forecasts. They mandated a set of standardised returns for fund managers to use in marketing or projection calculators. It meant, for example, that some fund managers had to swap out their previous 10%+ p.a. return estimates for growth funds, and use a far more modest after-tax and after-fee FMA-approved estimate of 4.5% instead.
If you're keen to know more about why and how the FMA sets fund projections, click here.
Understanding long-term returns
International research house Morningstar uses a five-pillar approach to rate fund managers: People, Process, Performance, Parent and Price. On performance, it encourages investors to look at the long-term performance and track record of a fund manager, not just what they pulled off over a few years in a bull market. But what’s a proper time frame for a track record?
Morningstar, which produces comprehensive (and publicly available) quarterly reports on KiwiSaver, suggests it takes around seven years to see a pattern. While Morningstar does provide quarterly performance data, it also reports on one, three, five and 10-year returns. Over the 10-plus years it has been tracking KiwiSaver funds, Morningstar has found peer group averages to be doing better than the FMA’s standardised projections. The Aggressive fund category average has given investors an annualised return of 8.5%, followed by Growth of 8.0%, Balanced 6.4%, Moderate 4.3%, and Conservative 3.9%. See their 30 September 2022 quarterly report here.
While investors may find these figures somewhat more appealing than the FMA’s projections, no one can know or predict what the next 20 years will bring. And until recently, very few investors cared about any of the above. It took some major market meltdowns to win their attention - from the GFC (soon after KiwiSaver was first launched in NZ), to the initial outbreak of Covid-19 in 2020, to the more recent interest rate and inflation hikes and the Russia-Ukraine war in 2022.
Many investors are still licking their wounds from Covid-19, and some are looking for sunnier climates via different fund managers. In the early days of Covid, when markets fell, some panicked investors fled from growth funds to conservative funds, regarding them as safe and stable havens. It was a move many later regretted. In fleeing from funds with more shares than bonds and fixed-interest investments, they not only crystallised their losses, but they also lost out on the subsequent rally in share markets, with growth funds climbing to record heights (aka the “bull market”).
Worse yet, despite expectations they would be safe and cozy in conservative funds, monetary policies worldwide dealt a blow to these types of funds’ performance too. As interest rates rose, the theoretical value of bonds fell, hurting those in conservative funds.
Once bitten, twice shy?
The fear now for many investors is whether switching funds or managers will deliver another blow to their KiwiSaver balance. Investors who learned the pain of “locking in losses” and then missing out on gains don’t tend to want to repeat their mistakes.
However, there is an important distinction to make here between switching fund types and switching fund managers. The difference is akin to joining another team, versus playing another position on the field. When you leave one fund manager for another but stay in the same fund type, you’re effectively hoping that the manager is going to perform better overall. When you switch fund types, it’s more like going from an offensive to a defensive position (or vice versa) - making a bet that you’ll do better by reinventing yourself as a different type of player with different skills and build altogether.
Keep in mind that if you switch KiwiSaver scheme managers, you’re not leaving a bear market for a bull market. Everyone is still in the same market, and by most accounts, it was a rough one in 2022. How it plays out in 2023 though is anyone’s guess.
In a nutshell, when you decide to switch KiwiSaver managers, your existing provider gets notified, you pay any remaining taxes and fees owing, and the units that you owned are sold back to the markets. The funds are then sent to your new provider for reinvestment in the markets. And depending on how much you have and what fund you’ve chosen to go into, you’ll purchase ‘x’ number of units at the price they are valued at (this pricing usually lags the market by 2-3 days). Most people will see that their balance won’t dramatically change, and you can roughly figure out what you’ll get - but not perfectly, because you are out of the market for a few days, and the market is always on the move.
We can’t tell you the perfect time to make a move, or what move to make, but an understanding of how switching providers (or KiwiSaver fund types) works, and what to look out for, is a great start. After all, as they say, knowledge is power.
The information provided and opinions expressed in this post are intended for general guidance only and not personalised to you. These materials do not take into account your particular financial situation or goals and are not financial advice or a recommendation. This post is not intended to convey any guarantees as to the future performance of any of the investment products, asset classes, or capital markets mentioned. Past performance is no guarantee of future performance. Information is current at the time of posting, and subject to change without notice. Simplicity NZ Ltd is the issuer of the Simplicity KiwiSaver Scheme and Investment Funds. For Product Disclosure Statements please visit our website simplicity.kiwi.