by David Chaplin and Greg Bright
Two stories in recent weeks from New Zealand may cast a light over the future direction for funds management and ‘product’ fees, such as those charged by super funds, in Australia and elsewhere. Because of its unique nature in the financial services world, New Zealand is becoming an interesting test tube for larger savings systems.
Firstly, a June study on the after-fee performance correlation of KiwiSaver schemes, found no correlation between low headline fees and after-costs performance.
And last week the $800 million small cap specialist boutique firm, Pie Funds, made an aggressive pitch to the KiwiSaver market with the launch of an actively-managed scheme priced on par, or cheaper, than a vanilla index-based rival.
New Zealand is unique from a financial services perspective for several reasons:
- Although its saving system is small in aggregate, it is quite complex and sophisticated, like ours
- New Zealand’s share market is disproportionately small because most of the domestic banks were taken over and de-listed by the Australian banks and it has little-to-no resources sector, which means local investors have to go offshore for more of their exposures
- The New Zealand financial services market is highly regulated, possibly more so than Australia’s, something which is also easier to oversee due to its size
- Thanks to Xero, FNZ, SuiteBox and a number of other technology-orientated financial providers, coupled with an economic resurgence which has reversed the brain drain (there are now more Australians moving to New Zealand than vice versa), New Zealand is becoming a genuine innovation hub in the region.
Like super in Australia, KiwiSaver is the growth engine of the local funds management market; and, also like super, there is an intense focus on KiwiSaver fees. But last month, a new analysis of KiwiSaver funds found no link between low fees and outperformance – indicating the price-only focus might be counterproductive for investors.
KiwiSaver fee analysis
KiwiSaver schemes, which number about 30 and have a total of about NZ$50 billion in assets, are ‘soft compulsion’ savings schemes which have some tax advantages. Also younger members are able to use their savings in a first-home purchase.
The recent fee analysis, by Binu Paul, co-founder of online financial product comparison site Pocketwise, shows even the worst-of-the-best KiwiSaver funds in the study period typically outperformed cheaper options – often by 1 per cent or more.
The Pocketwise study compared the five-year (or 10-year where available) rolling returns (after tax and fees) of 103 KiwiSaver diversified funds over six annual periods ending March 31 from 2013 to 2018.
Based on broad asset class weightings the analysis lumped the funds into three categories analogous to conservative, balanced and growth funds – including only the highest-performing 15 per cent funds and the cheapest 15 per cent of funds in the final analysis.
Cheap products only crossed over into the high-performance data on three occasions – for growth and balanced categories in 2013 and conservative in 2018 – and always at the bottom end of that scale.
The research shows the lowest-performing of the top 15 per cent funds outgunned the best cheap versions by close to 1 per cent or more on 11 of the 18 data points (three risk categories measured over six annual periods).
According to the study, the highest-performing KiwiSaver fund outperformed the lowest-returning comparative cheap product by margins ranging from 1.66 per cent to 6.15 per cent over the six-year analysis period.
Using tighter asset allocation ranges – which cut the sample down to 47 funds – cheaper funds only reached high-performance levels in two of the 18 occasions measured.
Paul said running the study using a June year-end data yielded similar results to the March figures. However, he said the five-year return data was “arguably” insufficient to draw firm conclusions on KiwiSaver trends.
“We also looked at all the funds in each of the categories that have a full 10-year history,” Paul said in a statement. “Remarkably, even within that longer timeframe there was not a single instance where the cheapest 15% of funds featured in the list of highest performing 15% of funds.”
The study says given KiwiSaver has been operating in mostly benign market conditions the performance to date “does not provide any guidance on future direction of such trends”.
Paul said the study also excluded KiwiSaver funds without five-year histories, some of which offered low-fee options.
“With more and more pressure on providers to reduce fees, and with the launch of newer KiwiSaver funds with lower fee structures, it could mean that in future years the observed trends may change, but only time will tell,” he said in the release.
While the Pocketwise study found no correlation between high-performance and low fees in KiwiSaver, the report says investors do need to watch fund costs.
New active low-fee fund
Simplicity, which invests mainly into Vanguard index funds, was the first KiwiSaver scheme to build its offer overtly around low fees. Launched in 2016 by former Tower Investments chief, Sam Stubbs, Simplicity set a new low bar for KiwiSaver fees of about 30 basis points for each of the underlying three risk-weighted funds – conservative, balanced and growth – plus an annual fixed member fee of $30.
It was a well-timed marketing move: since going live in September 2016 Simplicity has attracted over 15,000 members, representing more than $400 million – a big enough deal in NZ terms.
But last week Pie Funds, an Auckland-based boutique firm, better-known as a small caps manager, took the battle to Simplicity with the launch of an actively-managed KiwiSaver scheme – under the Juno brand – priced at or below the Simplicity model.
Uniquely, the Juno scheme has a tiered pricing model that charges members a set annual dollar fee that ratchets up across four or five account balance thresholds.
For example, members with balances between $100,000 to $1 million would pay an annual fixed dollar fee of $600 while those aged under 18 or with less than $5,000 on account get the service for free.
While some competitors were sceptical the Juno fee model would be sustainable, Mike Taylor, Pie Funds CEO, said as KiwiSaver member growth soared towards 3 million there was plenty of scope for niche players to carve out profitable opportunities.
“Simplicity, for example, has grown to 15,000 members in a couple of years,” he said – a membership figure that would translate into Juno revenue of $9 million, assuming they all sat in the $600 fee bracket.
In fact, Pie is making a direct pitch at the cost-conscious Simplicity market with a fee comparison showing the Juno scheme all-in price falls permanently below its passive investing rival for balances above $180,000 – and close to, or under, for lower account sizes.
The Pie projection, based on a number of assumptions including average annual returns of 8 per cent, shows Juno costs sinking to about 10 basis points for large KiwiSaver balances compared to roughly 40 basis points for Simplicity.
“We think our actively-managed approach will resonate with people who have their KiwiSaver at boutiques or banks,” Taylor said.
The Juno scheme won’t invest directly into any of the other 10 funds in the Pie portfolio. Instead, the KiwiSaver funds will be managed in three risk profiles – conservative, balanced and growth – investing in a mixture of cash, offshore equities and global fixed interest.
However, the Juno investment strategies would dovetail with Pie’s other global share funds, including the recently-launched Climate Friendly large cap international equity product.
*David Chaplin is the publisher of Investment News NZ