[GRTV] Three to four fund sweet spot with multi manager KiwiSaver

KiwiSaver is not perfect but even in its current state it is still positive and important to New Zealanders.

Wednesday, December 20th 2023, 6:31AM

by Andrea Malcolm

Jason Choy, senior investment portfolio manager at InvestNow KiwiSaver says, “We have close to 75% of the working age population enrolled with KiwiSaver and closer to 90% of employees. But real change will take time and we need policy makers to give it the time of day. We are starting to see some substantial balances, so Kiwis should be taking it more seriously.”

Choy says adviser engagement with KiwiSaver is improving but overall it is always an uphill battle to get them to see KiwiSaver in a strategic way.

InvestNow has tried to bridge that gap by providing a better value proposition with the Connect KiwiSaver solution.

InvestNow’s KiwiSaver scheme has two core pillars – the ability to invest with multiple managers – 15 fund managers across 40 fund options and cost-efficiency with no additional admin fees or markups.

“We offer funds across the spectrum in terms of fees starting at three basis points per annum.”

Getting more adviser engagement with KiwiSaver

The FMA has set the guidelines and aren’t big fans of trail commission where clients are put into one KiwiSaver solution, with a long trail for the adviser which is not really disclosed anywhere, says Choy.

“We’ve designed our scheme to address that shortcoming and offer a fee for service, and offer that value for advice angle.”

Choy says advisers can take an up to 50 basis points advice fee on the KiwiSaver portfolio assets and that could be across a wide range of managers and funds.

It’s up to the adviser and client to set the advice fee but Choy says InvestNow is finding that in general that 50 basis point ceiling is more than enough for what advisers nee, which is the 25 basis point region to reflect that KiwiSaver is more light touch, in the sense that it shouldn’t be changing it all the time.

“But if there are multiple portfolio changes or a client’s circumstances change then they can easily switch to another fund option.”

Choy says when clients switch funds in the InvestNow KiwiSaver scheme they stay invested in the market for longer because ordinarily changing manager or fund means a change in provider altogether which could result in the investor being out of the market for up to two weeks.

“There was a Russell Investments study recently which showed that if you were invested for every single day in the NZ market for the last 10 years you got a roughly 230% return. If you missed out on just the 10 best days in the market in that 10 year period brings that right down to 135% and missing the best 30 days brings it down to something like 30%.”

How many funds do people generally use when they put together multiple funds in the InvestNow scheme?

“With the advisers we work with they generally go with four to five,” says Choy. “There are benefits to diversifying more than that but it is a marginal diminishing return. Studies have shown that somewhere around the region of three to four is the sweet spot. If you add one additional manager you can bring volatility down by around 50%, adding a second and third one brings it down to around 20-33%.”

InvestNow doesn’t recommend a model portfolio but it has been working with advisers to help them build out portfolios and do a lot of modelling.

On the National party’s pre-election promise to allow KiwiSaver to be split across multiple providers Choy says it’s good to see acknowledgement of diversification amongst managers but at the same time InvestNow isn’t keen on diversifying across providers.

“There are definitely benefits in having a single provider solution such as InvestNow while still offering multiple managers because when you have KiwiSaver across multiple providers, it’s a lot more additional cost.

“Each provider may charge an annual management fee and admin fee. Equally when you want to use KiwiSaver to do a first home withdrawal, you’re talking to three different providers to get that sorted and even if you want to do simple stuff - like what’s my KiwiSaver balance - there’s no consolidated reporting.”