Kiwisaver: Chasing higher returns

Q: I have belonged to KiwiSaver since 2007 and have another five years to go until I retire. Because of my age, I was advised to put my funds in the "conservative fund" to minimise the risk of any losses. However, lately I've been contemplating splitting my total savings - keeping half in the conservative fund and putting the other on "higher risk" to take advantage of potential higher earnings until I reach 65. But I don't know if my provider will entertain this idea.

I would be interested in your thoughts on the matter if they say it can be done.

A: Firstly, take out the guesswork by completing a risk profile questionnaire. You'll find one at www.sorted.org.nz.

Risk profile questionnaires are not particularly sophisticated, but they give a reasonable indication of how you should be investing. If your answers indicate that you are a low risk investor, then leave your KiwiSaver funds where they are.

Regarding your timeframe, if you plan to cash up and spend your KiwiSaver in five years' then probably a growth fund is not appropriate as you need at least three years - preferably longer - to allow for volatility.

We have seen this over the past four years as growth funds (which have more shares) have generally not performed as well as conservative funds (more fixed interest and fewer shares).

It is easier to achieve more consistent returns with a conservative fund than a growth fund, as the latter has a higher weighting to shares which have less predictable returns than fixed interest.

When fund managers buy shares they are often taking a long-term view of the company, the market it is operating in and the economic outlook.

It can take time for their expectations to be fulfilled, or they may be disappointed.

Some fund managers may be something of a one-trick pony, and after a stellar year get less than impressive results.

It is important to choose your KiwiSaver fund manager on more than just returns. Other factors to consider are quality of communication, transparency, size of the fund, investment philosophy and fees.

Chasing potential higher returns will expose you to greater losses, and would it be worth it? How much are we talking about in actual dollars?

If you have, say, $10,000 in your KiwiSaver now and you contribute a further $1042 yourself plus $521 in MTC for the next five years, then at 4 per cent per annum your savings will grow to $20,970 while at 6 per cent per annum they will grow to $22,720 - a difference of just $350 per annum.

If we have a repeat of the past four years, your conservative fund could continue to outperform the growth funds.

Some may believe that we are due for a recovery from shares, but that's not a good reason to reposition your investment. You should be guided by your risk profile and your timeframe, not by trying to guess what markets are going to do - leave that to the professional fund managers.

Shelley Hanna is an Authorised Financial Adviser FSP12241. Her disclosure statement is available on request and free of charge by calling 8703838. The information contained in this article is of a general nature and is not intended to provide personalised advice. If readers have any KiwiSaver questions they would like answered please go to www.peak.net.nz or email shelley.hanna@peak.net.nz.