The storm over the Herald's Dirty Secrets of KiwiSaver series widened this week, as the pervasiveness and scale of international indexes -- many containing traces of controversial, potentially illegal investments -- became apparent. The broadening of debate has raised questions about how far potential legal problems spread, whether current disclosure by providers is sufficient and how much it will cost funds -- and, indirectly, individual KiwiSavers - to come clean. The widespread use of index funds - first highlighted by Radio NZ's Anusha Bradley - has widened the number of providers found to be exposed to controversial holdings. Initial Herald analysis of disclosures of direct KiwiSaver holdings found three providers - Westpac, AMP and Aon -- with holdings in cluster bomb manufacturers. In-depth analysis of just one index fund, one of the many used by KiwiSaver providers, has seen this number double. As a case study in how index investments affect fund exposure to controversial stocks, the Herald analysed the Vanguard International Shares Index Fund (VISIF). That fund is used by at least three KiwiSaver providers: Grosvenor, Westpac and ASB. A total of 2.64 per cent of VISIF's holdings were found to be in stocks of companies that have been blacklisted by the NZ Super Fund over ethical and legal concerns. • See our Herald Interactive: Dirty secrets of your KiwiSaver • KiwiSaver clusterbomb: Banks run for cover The 18 companies identified were mostly in the tobacco industry, but also included a handful involved in the production of nuclear weapons, anti-personnel mines and cluster bombs. This means the $734 million in combined investments that the New Zealand providers have in the VISIF results in their KiwiSaver clients having an indirect exposure to these blacklisted companies, amounting to $20m. While it's a headline-grabbing figure, the sum becomes considerably smaller once it is broken down by industry and then by individual funds. Indirect exposure to the most troubling category - companies producing cluster munitions - drops to a combined $1.1m, spread across 15 schemes. Over the past week, Westpac and ASB have announced a review of their KiwiSaver investment policies. Radio NZ reported that Grosvenor went further and announced that it would divest from Vanguard entirely.
Having a responsible investment policy is necessary but nowhere near sufficient.AMP has said it will divest its cluster bomb holdings - held indirectly through unit trusts - by the end of October. Aon has not responded to media queries. The widespread use of index funds - the VISIF outlined above is just one of many which have received billions of investments by KiwiSaver providers -- calls into question whether fund providers' current disclosures of their holdings are sufficient, and also whether the information provided is accessible or understandable to the average retail investor.
The eventually-found disclosure statement was a spreadsheet with just three columns - featuring each investment's name, its percentage of fund holdings and identification numbers - stretching down to nearly 2500 rows.These questions are being asked by fund managers themselves. Carmel Fisher -- whose Fisher Funds had declared a small exposure to tobacco and nuclear weapons firms -- said the saga had progressively widened over the past week to include competitors whose own controversial holdings had been folded into index investments. "Since your first report, various KiwiSaver providers have come out and acknowledged that they do have exposures to armaments and tobacco, even though a casual glance at their disclosures suggested otherwise. We know that KiwiSaver members want to know actual exposures to certain industries and companies and they don't want their KiwiSaver providers to hide behind index funds or other funds managed for them by someone else," she said.
If investors want to find further information about an underlying fund then they can ask their provider to give them more detail."If investors want to find further information about an underlying fund then they can ask their provider to give them more detail," the spokesperson said. Even as the scale of the problem has widened, the issue has cystallised debate over what it would cost to resolve it. New Zealand Superannaution Fund chief investment officer Matt Whineray says he is "encouraged" by the way debate has evolved, and moved from denying a problem existed to putting a cost on a solution. Broad index investments are relatively cheap, but management costs creep up with the more tailoring -- and exclusions -- that is required. "The response has not been the older, traditional one, we used to get of 'We're only concerned with financial returns,' but it's 'We take this seriously and we'll take a proper look at it'," he says. The $30 billion NZ Super Fund isn't tackling the concerns or complaints of individual KiwiSaver investors, but it has grappled with responsible investment issues since its formation in 2001 as part of the state-owned fund's mandate to not prejudice New Zealand's international reputation.
Having a responsible investment policy is necessary but nowhere near sufficient. You have to actively care about it and go and investigate and talk to these [underlying] fund managers."If you take out that sort of size chunk from the equity market you'll lose diversification. Our job is not to make everybody happy, but our job is to approach this in a structured and reasonable way," says Whineray. This isn't to say Whineray is saying he expects the Super Fund to remain in the fossil fuel game (a decision on whether the fund will divest from this sector is expect in the coming months), just that it is a big decision to make. "How you make your balance sheet resistant to the challenges of climate change is the $64,000 question -- or perhaps the $64 billion question." Making responsible investment decisions work in the face of indiscriminate index investments, says Whineray, requires work by fund managers. "The answer is, you have to want to do it. Having a responsible investment policy is necessary but nowhere near sufficient. You have to actively care about it and go and investigate and talk to these [underlying] fund managers." While not willing to disclose exactly how much the Super Fund's underlying fund managers charge to tailor their international index so it avoids companies on its blacklist, Whineray says it is "low to mid single figures." That is, the Super Fund gets charged fees of only 0.01 to 0.08 per cent of funds invested. This appears to be considerably lower than the costs faced by smaller, and fractured, KiwiSaver providers.