The New Zealand Institute of Economic Research (NZIER) has warned that KiwiSaver members in conservative funds are in for poor returns, in its first New Zealand Investment Quarterly.
Conservative funds, including the nine KiwiSaver default funds, mostly invest in sovereign (government) bonds and cash while allocating only a small proportion to shares.
They are expected to return only 4.6% per year to 2022, compared to the expected average 90-day bank bill rate of 4.2%.
“NZIER believes sovereign bonds will perform poorly in the medium term, which would drag down the returns from conservative funds,” said NZIER principal economist Aaron Drew.
Balanced funds, which invest less in government bonds and cash and more in shares, are expected to return 5.6% per year while growth funds, which mostly invest in shares, are expected to achieve an average return of 6.5%.
The returns are gross of fees and taxes.
“Conservative funds have performed very well in the low-rate environment we have seen since the GCF hit, but they are likely to significantly underperform growth funds in the long term,” Drew said. “There is a cyclical aspect to our forecast: we believe bonds, particularly sovereign bonds, are vulnerable to a correction when interest rates globally start to rise.”
Drew said funds would benefit from greater exposure to share markets and some alternative asset classes, which are expected to fare better than bonds in the medium term.
“Equities are looking like a mixed bag, with Europe, Japan and the UK offering better value than the US, Australia, Canada and New Zealand markets.”
Drew is hoping the NZIQ will re-ignite discussion about asset allocation in KiwiSaver.
Conservative and moderate funds account for almost 44% of the $27 billion measured in the latest Morningstar KiwiSaver Survey.
“Over 40 years, the difference between a growth fund and a default fund could add up to tens or even hundreds of thousands of dollars for a KiwiSaver investor,” Drew said. “There has been a lot of public discussion about KiwiSaver contribution rates and what is required to achieve a comfortable retirement, but members will not get the most out of the scheme if they are in the wrong type of fund for their risk profile and investment horizon.”
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