Shelley Hanna: Diversify to avoid fund losses

Q. I am 58 years old and have been in KiwiSaver since it started six years ago. As we've paid off our mortgage I have been contributing the maximum of 8 per cent and my balance is now more than $40,000. By the time I get to 65 I could have well over $100,000. The balanced fund I am in seems to be doing well but I am wondering about the old adage "don't put all your eggs into one basket". As you can't join more than one KiwiSaver scheme what can I do about this?

A. Well done on your savings, you are no doubt pleased with the decision you made back in 2007. The expression "don't put all your eggs in one basket" is probably one of the most overworked phrase in investing, but for good reason. Investors are often tempted to focus on one strategy believing that it will give the best returns at that particular time until the bubble bursts. Gold is a good example. Some investors believe it is the best investment of all, providing protection in the event of a financial collapse. I expect there will always be some support for gold, but as an investment it can be very risky indeed. If you'd bought gold 10 years ago you would have done very well, but if you'd bought gold two years ago when it was over US$1800 an ounce you would be down more than 30 per cent.

Diversifying away from an apparently winning strategy is hard to do, but it is essential to avoid losses. KiwiSaver fund managers are required to develop a mandate for the funds that they manage, and provide information to investors as well as to the fund trustee and the Financial Markets Authority. This oversight is designed to ensure KiwiSaver managers have well-diversified portfolios which are aligned with their offering documents (investment statements). Every decision a fund manager makes should be documented and appropriate to their strategy.

As a starting point, a fund manager will set benchmark ranges for each asset class. A conservative fund will have a higher range for lower risk investments while a balanced or growth fund will have a higher range for shares and other higher risk investments. The fund manager will then decide how to diversify within each asset class.

Most KiwiSaver managers will manage NZ and Australian investments themselves but they will delegate the management of overseas investments to specialists in those areas, which are carefully selected based on their investment philosophy, track record and cost.

There is a cost to using overseas managers, and this has to be justified. It should not impact too much on returns or push the overall cost of the scheme beyond what is regarded as reasonable.

KiwiSaver managers are required by law to communicate with their investors on a regular basis. It is up to each investor to read what they are sent and take an interest in where their savings are invested. Questions to ask are: Is this fund active or passive? How well diversified is it? Does the manager use other managers for some of the asset classes? How big is the fund? Who is the management team? What is their track record?

You should review your risk profile as you near retirement. A balanced fund may be good for you now but perhaps not so good when you get closer to retirement.

At that point a conservative fund may be more suitable, or a "life stages" fund which automatically adjusts your asset allocation as you get older. Invest some time in your KiwiSaver and make sure it is the right one for you.

Shelley Hanna is an Authorised Financial Adviser FSP12241. Her disclosure statement is available on request and free of charge by calling 870 3838. The information contained in this article is of a general nature and is not intended to provide personalised advice. Send your KiwiSaver questions to shelley.hanna@peak.net.nz. You can read earlier columns at www.peak.net.nz