Market exposure for KiwiSavers restricted

Q Our sharemarket is relatively small, so what impact do KiwiSaver contributions have - especially when the Member Tax Credits go through to fund managers at this time of year? Does it make a noticeable difference to trading volumes and share prices?

A Over the 12 months to 30 June 2012 just under $800 million was paid out in Member Tax Credits, mostly during July 2011 when Inland Revenue processed member entitlements for the preceding 12 months. This represented one quarter of the entire inflow to KiwiSaver over that period - quite a large sum over a short period of time. But let's look at the asset allocation of KiwiSaver schemes to see where that money went.

There is now nearly $12 billion in KiwiSaver accounts and the majority of KiwiSaver investors are in conservative funds. This means that there is more in fixed-interest type investments (both here and overseas) than share market investments.

The provider with the most funds under management is ANZ One Path with $2.9 billion. Their conservative fund has just 5 per cent in Australasian shares (spread across New Zealand and Australia). I asked Simon Botherway, who is GM Investment Management at ANZ Wealth, for feedback on this reader's question. He said: 'The Member Tax Credits received from the IRD are spread across the month of July and, given prevailing fund preference, a large proportion of members' contributions are allocated to conservative, fixed-income assets rather than shares. In July 2011 there was a pick-up in NZX market activity which was probably due at least partly to the investment of MTCs, however since then the MTC entitlement has halved.'

The New Zealand sharemarket is regarded as more high risk than larger overseas markets, so a large weighting is not appropriate for conservative investors. Why so many conservative investors? Partly a lack of confidence in financial markets, but mostly because of the large number of KiwiSaver investors who have been randomly allocated to one of the six default providers and from there into a conservative fund (the default option).

Should fund managers increase their weighting to New Zealand shares to help our economy grow? Because fund managers are looking after our KiwiSaver nest egg they reduce risk by diversifying, spreading funds as far and wide as possible, in accordance with their (mostly conservative) investment mandate. Further, because we are already investing directly in New Zealand through our homes and our jobs, many believe that most of our retirement savings should be invested overseas rather than here.

There are KiwiSaver funds with a larger allocation to New Zealand, although they are not the size of the big default conservative funds.

The Fisher Funds Growth Fund ($415 million) currently has a 26 per cent weighting to the NZ sharemarket while the Milford Active Growth Fund ($52 million) has a 44 per cent weighting.

When I asked for her view on the impact of KiwiSaver on our local share market Carmel Fisher, managing director of Fisher Funds Management, said: "KiwiSaver will certainly have provided an element of support for the NZ share market, particularly as individual investors and managed fund investors have withdrawn from share market investments in favour of more 'safe haven' assets in the past four years, however the impact has not been significant."

While KiwiSaver is expected to grow substantially over coming years the New Zealand share market is also expected to grow with the planned SOE privatisations.

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.