KiwiSaver shakeup sees billions shift out of munitions funds

Nuclear weapons were among the controversial weapons investments. Photo / Getty

Concerns about controversial KiwiSaver investments sparked a seismic, and ongoing, shakeup of the sector that has seen billions of dollars moved in a flight to responsible investing.

While $109 million of investments were quickly dumped by providers, including all holdings in banned weapons makers, an arguably more significant development has seen providers shift billions following reviews of how they manage indirect holdings in international equities.

KiwiWealth this week told the Herald it was intending to bring such investments in-house, expecting to transfer up to $500m of client funds into a new vehicle in the new year, part of a seismic shift that has seen at least $1.6 billion in funds in the industry find a new home.

The moves come from a survey of large KiwiSaver providers, who control 90 per cent of the market, by the Herald tracking developments in the sector.

The issue first burst onto the public agenda in August after a series of stories by the Herald and Radio New Zealand highlighting how more than two millions New Zealand savers had, likely unknowingly, become investors in controversial industries.

Herald analysis of the holdings of nearly 500 individual KiwiSaver funds found nearly a dozen providers had made $153m of investments in companies that had been blacklisted by the Government's own New Zealand Superannuation Fund.

The blacklist included makers of cluster bombs, landmines, nuclear weapons as well tobacco producers and companies guilty of gross human rights abuses.

The weapons investments were particularly thorny after concerns were raised in Parliament and by legal academics and activists that they may contravene New Zealand legislation and international agreements banning the armaments.

While an assessment of the issue by Police and the Financial Markets Authority declined to open a criminal investigation, public concerns and lingering uncertainty has now seen 100 per cent of the $42m of identified KiwiSaver investments in these weapons makers now either dumped or slated for divestment.

Resolving issues around indirect exposures are ongoing, with providers seeking to solve the problem of avoiding controversial investments while also continuing to provide savers with broad exposure to international equity markets.

International fund provider Vanguard launched a New Zealand-targeted screened international fund earlier this month that has already secured around $500m in new business from KiwiSaver providers Booster and Simplicity.

The move followed ASB's October decision to changed external providers - from Vanguard to Blackrock - in a moved understood to involve more than $900m in client funds. Despite losing ASB's business, Vanguard this week said it was "encouraged by interest shown" by other providers still weighing up their options.

KiwiWealth chief investment office Simon O'Grady said his firm had been looking at the area for a while, but had only recently decided on a firm course of action.

"It's a difficult area, we've spent a bit of time thinking things through, but it'd be fair to say your excellent investigative piece has accelerated this process for us," he said.

O'Grady said a survey of KiwiWealth clients had found concerns were highest over exposure to nuclear weapons makers and whale meat sellers - reflecting particular New Zealand values - but most put financial performance as their primary objective.

Exploring external providers who also operated appropriate screening had raised concerns over fees and tax complications, so the decision had been made to set up an in-house fund to manage international exposure, he said.

"What we're doing is building our own solution," O'Grady said. He indicating the vehicle would go live in the first quarter of 2017 and "anything between $200m and $500m would end up in this particular structure immediately".

ANZ, the country's largest KiwiSaver provider who had moved quickly to divest direct holdings in all controversial stocks, said it was "working on a solution" to the index issue and expected to be able to announce the results to the market early next year.

Westpac has also changed external providers in December, to State Street, and said its divestment process from controversial weapons - although not tobacco - was expected to be completed by the end of 2017.

Booster - the provider to seed the new Vanguard fund with $400m - said its own review was ongoing.

"The next cab off the rank is emerging markets exposure," said chief investment office David Beattie, who was also keen to draw a distinction between its general and ethical investment options, with the latter offering far more comprehensive screening.

Mercer and ASB said reviews of their KiwiSaver responsible investment policies were ongoing - including into tobacco holdings - with results likely to be made public early next year.

At least part of the motivation for this shakeup came from individual KiwiSaver investors voting with their feet.

According to monthly churn data for the scheme, provided by Inland Revenue, in the two months following the launch of the series an extra 5300 people switched schemes, seeing them transfer an estimated $61m in funds under management.

Providers have sold $109m investments, including all identified holdings in banned weapon-makers.

More than 5000 investors with accounts worth $61.1m changed providers.

More than $1.8b in investments in international index funds has shifted