May 13, 2019
Mark Cox

Kiwisaver and the joys of compound growth

Disclaimer: This article is not presented as advice, and it should be remembered that the value of funds can go down, as well as up.

According to the latest quarterly report from the financial research company, Morningstar, the total value of KiwiSaver funds in the March 2019 quarter was $54.7 billion1. This was $8.2 billion more than a year earlier.

The report provides a breakdown of the total asset value by type of fund, and the chart below indicates that 37 percent of assets are in higher risk (i.e. Aggressive and Growth) funds, 39 percent are in medium risk (i.e. Moderate and Balanced) funds, and 24 percent are in lower risk (i.e. Default and Conservative) funds.

Source: Morningstar

One interesting feature of the chart is that it indicates that almost one-fifth of all KiwiSaver assets (worth just under $10 billion) are in Default funds, which are used for individual savers who made no active decision about how their saving should be invested. The significance of this is that Default savers could be forfeiting very large amounts of money in the longer term.

The Morningstar reports also show the growth performance of the types of different funds over the past 1, 3, 5 and 10 years. The graph below shows the 10 year performance of the fund types over the past 10 years, and it reveals a considerable spread across the types. Interestingly, Aggressive funds have not performed as well as Growth funds, but it is evident that Default funds have performed even worse than Conservative funds.

Source: Morningstar

On the face of it, the difference between 6.0 percent per annum growth in Default funds and 10.9 percent per annum growth in Growth funds might not seem all that great but, as was hinted earlier, the long run performance of different types of fund, if maintained, could result in startlingly dissimilar outcomes.

This is illustrated in the next graph, which, for simplicity, is based on a hypothetical saver who has a fund of $5,000 early in their career and then makes no more contributions, for whatever reason. The graph indicates that the $5,000 in a Default fund would grow in compound fashion to just over $53,400 over the 40 years. However, the $5,000 in a Growth fund would grow to just over $313,500. In other words, the Growth fund would be worth almost 6 times as much as the Default fund.

Source: BERL calculations

The obvious conclusion here is that KiwiSavers in Default funds are being let down by their advisers, or are letting themselves down through their inaction. Even Conservative funds look a better prospect and, for less risk-averse saver, Moderate and Balanced funds would be much more rewarding.