Q: I've been following the discussion re the change in default KiwiSaver providers.
I would be interested to see a chart with the past returns for 1, 3 and 5 years for all the current and prior default KiwiSaver providers.
For me, unlike others, returns factor into my investment decisions. Just curious to know what this chart looks like.
To be honest, I'm glad I didn't pick all my fund investments based solely on fees in the last few years. Some of the active funds I invested in have done quite a lot better in the last five to six-year timeframe than passive low-fee index funds.
A: Your wish is my command — see our table below. Well, almost. I didn't bother with three-year returns.
I need to say upfront that one-year returns are meaningless. There's so much luck in doing well or badly over 12 months. For that matter, I don't put much stock in five-year returns. Even long-term returns tell us little, except to exclude funds that keep doing badly, and to note a fund's volatility.
Often, some high-fee active funds — whose managers select investments — will shine in one period. But much research, which I have written about many times, shows that funds that do well in one period often do badly in the next period, so there's little point in watching them.
On the other hand, fees don't change much. So, given that we can't forecast which funds will do well in future, it's best to go for low-fee passive funds — whose managers simply invest in the shares in a market index. This applies to both KiwiSaver and other funds.
Still, I've put together the table as requested. What does it show? Recent performances of the default KiwiSaver funds being dropped in December and those being kept are, on average, remarkably similar. The two new default funds happen to stand out. Simplicity had by far the highest one-year return, and SuperLife had by far the highest five-year average return.
However, that wasn't why they were chosen. The decision makers — an expert panel — apparently thought, like me, that past returns don't mean much. They decided the main criteria should be low fees and good communication and other services. And Simplicity and SuperLife will charge the lowest fees of all the default funds.
On your comment about how your active funds have beaten low-fee index funds recently, can I be cheeky and ask if you have checked that, taking care to compare like with like?
People are always telling me their fund has done brilliantly lately. But almost all higher-risk funds that hold many shares — whether high or low fees — have had an extraordinary run in recent years. It's not uncommon for people to be thrilled with what has, in fact, been a below-average performance, perhaps because their fund manager has been unjustifiably skiting.
Speaking of which, the Financial Markets Authority (FMA) says this problem could be worse in the next month or two.
"The funds management industry has been warned to avoid advertising large investment returns for the 12-month period to March 31 this year, since this could mislead investors.
"The period includes none of the severe February and March 2020 Covid-19 sell-off in the market, but all the following recovery. The result is some phenomenal returns for many funds, particularly those with large exposures to equities (shares)."
The FMA gives examples of how distorted returns are for that particular 12 months, compared with the 12 months ending just one month earlier, on February 28, 2021:
• The NZX50 New Zealand share index rose 24 per cent, compared with 8 per cent in the earlier period
• The MSCI world share index rose 58 per cent, compared with 23 per cent
The FMA says that it is "concerned investors being marketed returns for the 12-month period through social media, websites and other channels, without context, may be misled into thinking they are typical market performance or that particular managers have significant, repeatable skill."
If anyone sees a fund manager trumpeting returns for the year ending March 31, let's hear about it.
Simply the best?
Q: I have a question re the review of KiwiSaver default schemes and your recommendation last week to your correspondent, whose default provider missed out, that "switching provider would probably be a good move".
Surely the fees charged are only one part of the equation — what about comparing the net returns of schemes to see who is better to invest with?
Frankly, I am not particularly concerned about fees charged on my scheme but focus on growth in my funds. You generally get what you pay for re fees — lower fees are charged where there is less management of the fund and it is left to drift in line with pre-set parameters, whereas you pay extra for managed input.
And another point — I have been happily with Fisher Funds, by choice, for many years (one of the default providers who lost that status). I note that this week in the annual INFINZ awards they won the Fund Manager of the Year awards in both the bonds and equities classes. So I question your assertion that the fact that some default funds "weren't reappointed suggests they are not the best in town".
A: Warning: my reply will probably make you cross. We all tend to think positively about major purchases we've made. It's called post purchase rationalisation, and I've seen it apply to fund choice many times. But it's wise to try to look beyond it.
You're quite right that higher fees will tend to buy you more management. But does that translate into higher returns? It doesn't tend to over the long run. It's really hard to keep picking shares that will perform better than average, and to correctly time your buying and selling.
This is true in both rising and falling markets, despite what active managers say. I wrote about that during the Covid downturn last year, when passive funds more than held their own.
The net returns comparison you ask for is in our table. While Fisher Funds performed well, the two new low-fee passive providers did a little better on average — although it's all pretty meaningless, as I say above.
On the INFINZ awards, Fisher Funds did indeed star this year. And looking back, Fisher has won the bonds award three times in the last five years. That's impressive. However, Fisher has never before won the equities (shares) award, going back to 2003.
Note, too, that these awards seem to go only to active managers.
What really matters for default fund members, according to the panel that selected them, are fees and communications. The INFINZ awards don't seem to take much notice of communications, and I don't know how good Fisher Funds is at that. Perhaps they are great.
But the awards do look at fees, and I doubt if Fisher got many points on that count. Most Fisher KiwiSaver funds charge higher than average fees. And of all the current default funds, Fisher charges the highest fees on balances of $8000 or more, and close to the highest fees on lower balances.
I am not saying Fisher Funds is a bad provider. Stick with it if you want to. But I'll stick with what I said to last week's correspondent.
One final point: KiwiSaver default providers are handed extra business by the Government — i.e. taxpayers. It's fair that they are scrutinised.
When a partner dies
Q: Men seem to die first, and we have shared some unfortunate experiences recently with widowed friends a few months following the event.
From well organised situations they suddenly find household utility payments, rates, power, phone, insurances etc. to be in arrears.
It would seem in most cases auto payments were traditionally made from accounts which were not joint accounts that required the authorisation of either partner. These accounts, I think, were in the name of the husband only and understandably, I suppose, payments from them ceased when he did.
I do think a good bank should spot and warn in these circumstances, but is there one capable?
A: It would be great if a bank did that. But clearly some don't, given your experience.
So every couple, regardless of age, should check with their bank — now — that automatic household payments would continue if one partner dies. If not, change account type.
Thanks for pointing this out.
Helping a home-buyer
Q: Can you tell me if there are any concerns re a son becoming a part owner of our house and taking on a percentage of our existing mortgage?
Our percentage of ownership would be reduced, but it would allow him to be part owner of a home.
Are there any negative financial implications?
He would access his KiwiSaver (presumably allowed to as part owner?) and live with us for six months or however long we could all survive (haha).
We would be able to be mortgage-free and he would have a step on the proverbial ladder.
A: Sounds good, and Inland Revenue seems relaxed about the tax side.
"We assume the partial sale of the property to the son occurs outside of the bright-line period, or if within the bright-line period the property is the parents' main home," says a spokesperson.
"There are no immediate tax implications. However, because of the complexities involved in property and tax we always recommend consulting a tax professional before entering into any arrangement."
On the KiwiSaver rules, I struggled to find someone in government who would comment, so I asked one of the soon-to-be default providers, Simplicity.
"If the son was eligible (under the KiwiSaver rules) to access his KiwiSaver for a first home withdrawal, if there is a sale and purchase agreement in place and the son's name is on the title after settlement, he should be able to use his KiwiSaver to become a part owner of the house," says Sarah Clements, manager client service.
She adds, "We presume that the existing home owners own the property themselves (not in a trust) and the son will be owning the property in his own name also.
"I would recommend that each party gets independent legal advice and they put a legal agreement in place to ensure that all parties agree on the current value of the property (we would recommend getting a property valuation), how the expenses would be covered, maintenance, rates etc. Also what happens if one party wishes to sell the property etc, so that there are no misunderstandings."
Other points from Clements:
• Your son should pay market value. Otherwise, you have disadvantaged yourselves, which could affect your ability to get a future resthome subsidy.
• Add your son's name to the title as a tenant in common, not as a joint owner. Otherwise, if one of you dies, that person's "portion of the asset would not pass into the deceased person's will, as the survivors become the owners. Also, if there are other children to consider this may disadvantage them and cause family tensions."
• "If the son needs to borrow to buy into the property, and the bank has a caveat over the property, what happens if the son defaults on the repayments?"
• Consider what would happen if your son is in a relationship that breaks up and the partner has a claim against the property.
On that last point, a reader says, "Of course the best way to protect the money you lend or gift your kids from potential relationship property claims is for them to get a prenuptial type agreement. But in reality a lot of people just don't find that palatable." Try to.
Okay, no more letters on this topic for a while.
- Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to firstname.lastname@example.org. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.