Helen Twose

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Helen Twose: Tracking returns is a tricky task

By Helen Twose

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No simple answer to measuring KiwiSaver performance but new information rules next year will help.

It is not possible to capture the intricacies of a return in a single statistic. Photo / Supplied
It is not possible to capture the intricacies of a return in a single statistic. Photo / Supplied

I have been enrolled with KiwiSaver for the past five years.

What makes me nervous is when I realise I am not effectively measuring or tracking the performance of my KiwiSaver investment.

I do check account balances, annual statements, investment performance through the fund's annual reports. However, all this information does not tell me how well my investment is performing.

I made several attempts to add and subtract net transaction amounts (debits/credits) and then subtract it from the balance in my account.

Hopefully the numbers I am getting is the net return over the period. I tried to draw some conclusion to see if my investment is performing or not performing but I am not 100 per cent sure if this is the right way to measure the performance of my investment.

Here are some queries related to this:

•What is the correct way to calculate performance of an investment in KiwiSaver?

•How often will it make sense to review the investment returns trend? Annually, six-monthly, quarterly, monthly or fortnightly? If so, what is the best way to do this?

•Can the annual returns be calculated based on the March 31 PIE (portfolio investment entity) tax deduction?

Assuming my PIE tax rate is 28 per cent, $200 PIE tax has been deducted from my account for a particular year.

Does this mean there was a net return of $714 for that year on the investment?

•Are there any ready calculators or spreadsheets available to use to measure investment returns for an individual?

I feel that the retirement investment schemes should be reviewed or tracked periodically by each individual member, so it will help them to make informed decisions. This also may save them from surprises.

However, without useful information and meaningful periodic reviews people can lose money they are trying to save for their retirement.

Your questions on returns are important ones and there is no single or simple answer.

It is not possible to capture the intricacies of a return in a single statistic that can be compared. This is because variations in investment strategies, cash flows, tax, expenses, inflation and risk, all introduce complexities that make comparing the returns of different funds like comparing apples and oranges.

A return doesn't tell you whether they were driven by the strategy (the mix of cash, bonds, property and shares) or what happened in the market (for example, shares went up), or because of the decisions of the manager (which shares or more shares and fewer bonds) or the decisions of the investor.

Because the returns are different for all, simple comparisons are often misleading. The danger is that returns are calculated inconsistently and decisions then made on the basis of them.

The evidence is that most people who make decisions based primarily on past returns get the decisions wrong. This is particularly true when returns are compared between providers without first checking that they are comparable and what gave rise to them.

Most of the performance surveys published are gross-of-tax surveys. As the tax treatment varies it is possible to get a higher gross return and end up with a lower net return, than another fund.

Also surveys focus on percentages (which many people struggle to understand) and single investments (ignoring cash flows). International evidence shows that the managers who perform above average in one period generally underperform in the next period.

If you do look at returns, the important return is the one you get relative to what you were looking to get (after deducting taxes and fees), and what, in the circumstances, was reasonable. No survey can ever give you this because it is personal to you. This does not mean that surveys cannot be helpful, but it means that it is important not to make decisions on the basis of survey data and over short periods.

If you look at surveys, you need to look at the longer term. Some people are interested in the average return over 20 years and others are interested in the returns in each of the individual years.

If you focus on the short term you are likely to get less in the long term. If you focus on the long-term average you are likely to experience periods of low (or negative) returns. This is normal and has to be accepted.

Lastly, you cannot take the tax paid on your PIE statement and divide it by the tax rate to get the total return. This is because a portion of the return you receive may not be taxable.

Next year the position will get better as providers will have to show returns on a consistent basis and supply other information. This will make the comparisons better but comparing returns will still not be a good basis for making decisions.

What really matters is that you have the strategy that is right for you and then you focus on low fees.

•Michael Chamberlain, SuperLife principal.

Disclaimer: Information provided is stated accurately to the best of the respondent's knowledge at the time of publication. It is general in nature and should not be construed, or relied on, as a recommendation to invest in a particular financial product or class of financial product. Readers should seek independent financial advice specific to their situation before making an investment decision.

To have your KiwiSaver questions answered by the Herald's panel of industry players email Helen Twose: helentwose@gmail.com

- NZ Herald

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