Here’s an example from a 20-year-old Christchurch student, who has been contributing to KiwiSaver for three years and has a $2,700 balance.
“I recently shifted my provider from AXA to Westpac as AXA lost $1.50 on my investment of around $2,000 (in the 2008-2009 year). My statement from Westpac for the past financial year indicates another loss of about $2.50 (in the 2009-2010 year). I can't understand how both AXA and Westpac can have such a pathetic return. In comparison my Westpac savings account attracts 2 per cent interest.”
The problem is that the markets in which his funds invest have been extraordinarily volatile since KiwiSaver began.
In some ways it’s good that this happened in the scheme’s early days. People who have realized they can’t cope with a plunging account balance have moved to lower risk funds at a stage when they haven’t had large amounts to lose.
But volatility is unsettling, especially to the thousands of people new to this type of investing.
Even the less risky KiwiSaver funds, such as the six default funds, have performed erratically, to say the least.
These funds - which invest about 20 per cent in "growth" assets such as shares and property and 80 per cent in lower risk bonds and cash – hold more than a third of all the money in KiwiSaver.
According to data from Morningstar, annual after-fees returns in default funds range from a dismal minus 2 per cent in the year ending September 2008 to a sparkling 14 per cent in the year ending December 2009.
In normal times, this is a range we might expect for riskier funds. But in the last few years they, too, have upped the ante, with annual returns ranging from minus 26 per cent to plus 48 per cent. Wild stuff.
Will this volatility continue? Nobody knows. But in the past markets have always settled down after a while.
You might have noticed that I haven’t named the providers that have performed particularly well or badly. That’s to discourage KiwiSavers from moving to the best performers.
Research suggests this is a bad idea. Last year’s best won’t necessarily keep doing well, and in fact there’s sometimes a tendency for the best to do particularly badly in the next period.
Of more importance than which provider you are with is which fund you are in. If you can cope with volatility and have at least 10 or 15 years before you expect to spend the money, you will probably see bigger long-term growth in a riskier fund. If not, stick with a default fund or even a more conservative one.
That’s not to say you shouldn’t shop around the providers. Good reasons to move from one to another include:
• Your provider charges high fees. In some funds fees are four times higher than in other similar funds – which can make big difference to long-term growth. Check out the KiwiSaver fee calculator on www.sorted.org.nz
• Your provider doesn’t communicate clearly. You should be able to easily follow what has happened to your money.
• You prefer a provider that: offers advice; accepts low or no contributions; or is New Zealand-owned – or on the other hand has access to more resources because it is overseas-owned.
Footnote: In my last column I wrote about unsolicited offers to buy shares or finance company investments – usually at prices that are probably well below value. I’ve since heard that some people who took advantage of such offers months ago have still not received payment. You have been warned!