ANZ still dominates KiwiSaver FUM despite mediocre returns

But Milford Asset Management gained the most FUM in the year ended March.

Source: Milford Asset Management

This story was first published on Oct 8 and was one of the most-read columns I have published on Just the Business.

This column is free to all so you’re welcome to forward it to anybody you think may be interested. I intend to republish some more of the most popular columns from 2024 through January, interspersed with the occasional new column, before resuming my normal two columns a week schedule in February.

Fees vs performance

One of the things that has annoyed me about the Financial Markets Authority's ongoing campaign against fund managers charging excessive fees was that such judgements are too often divorced from how fund managers perform.

Yes, of course, the FMA was absolutely right in forcing fund managers to disclose their fees in ways that make it easy for prospective and existing savers to compare one manager with another.

And all too often fund managers use benchmarks that aren't appropriate – Fisher Funds was the classic example when it used 90-day bank bills and other interest rates as benchmarks for share funds.

In founder Carmel Fisher's favour, she did start using interest rate benchmarks at at time when the New Zealand yield curve was steeply negative so 90-day bill rates were much higher than normal for an extended period.

At that time, from about 2003, it was possible for retirees to put all their nest eggs into short-term fixed-interest vehicles to achieve decent longer-term returns and Fisher figured it was reasonable to promise to aim for better than fixed interest with a share fund.

But that's a very weak excuse – a benchmark for a share fund should never be an interest rate.

Don't get me wrong, fees absolutely do matter, but performance matters at least as much and can sometimes matter much more.

What about performance?

Back in 2021, when the government slashed the number of default KiwiSaver providers from nine to six, removing five and adding two new providers, the decision-making appeared very much driven by fees and not performance.

For instance, both the two new providers, Simplicity and NZX's Smartshares (which has now inexplicably dropped the “shares” part of its name to be branded simply “Smart” - I shudder to think how much the company paid for that spectacularly bad branding advice) are passive index trackers and so can offer much lower fees than active managers.

Tracking an index or indicies is simply miles cheaper, and these days easily automated, than employing finance professionals to manage money and to make investment decisions.

There is a perennial argument about whether such professionals actually add value – there have been many claims over the years than blind-folded monkeys throwing darts could be better stock pickers.

But some KiwiSaver managers do stand out as consistent out-performers.

Notably, Fisher Funds wasn't among the original six KiwiSaver providers, but took over Tower in 2013 which was, and it was one of the nine managers chosen in the 2014 review, only to then be one of the five culled in 2021.

But then it bought Kiwi Wealth, which was a default provider, in late 2022.

Did performance justify higher fees?

Fisher's track record on investment returns to date has been consistently good, so it was clearly its fees which counted against it.

The Kiwi Wealth funds certainly did Fisher proud with the growth fund ranking second best performer in the latest year with an 18.7% return, the balanced fund ranking the best balanced performer with a 15.1% return and the default conservative fund also ranking first with a 9.6% return.

Default providers are randomly assigned new KiwiSaver members who don't actively choose a manager by Inland Revenue.

Melville Jessup Weaver's analysis of KiwiSaver assets and returns for the year ended March published last week shows the most successful managers don't necessarily produce great performance.

MJW's work also shows how lucrative KiwiSaver is becoming, with fees and expenses rising to a collective $782.8 million in the latest year, up 18.4%, slightly slower than the 19.3% aggregate growth in funds under management (FUM) to $111.76 billion.

That growth is a combination of ongoing individuals' contributions, their employers' contributions and the government's matching contributions.

But Milford Asset Management, probably the most consistent high performer over an extended period, did show the biggest growth in FUM in the latest year.

Milford's FUM rose by $2.45 billion to $8.1 billion in the year, making it the fifth largest provider and overtaking AMP.

Milford gained, but ANZ stayed market leader

However, that gain still put Milford's FUM at less than 40% of the $21.03 billion of ANZ's FUM, which continues to be the largest KiwiSaver manager, despite its returns being mediocre at best.

ANZ also saw the third-largest inflow of FUM at $2.33 billion, not that much less than Milford's, suggesting ANZ is benefiting from its sheer size.

Fisher was the second biggest gainer, adding $2.39 billion taking FUM to 16.81 billion, overtaking ASB to become the second largest provider – but ASB's $2.07 billion increase in FUM to $16. 55 billion was the fourth largest in the latest year.

ANZ was one of the five to lose its default status in 2021, but it still has the biggest market share with $21.03 billion of funds under management (FUM) at March 31, up 12.4%, or $2.33 billion, from a year earlier.

ANZ's growth fund ranked 15^th out of 15 funds in the latest year with an 11.5% return and was 14^th out of 15 funds over three years with a 4% annual return.

It was 10^th out of 15 over five years with a 7.1% annual return and sixth out of 13 funds over 10 years with annual returns of 8.4%

MJW classified funds with between 66% and 85% of the FUM in growth assets as growth funds.

Does out-performance justify higher fees?

By contrast, Milford's growth fund ranked 4^th in the latest year with a 17,9% return but was best performer over three, five and 10 years with an annual return of 10.4% over the 10 years.

Milford earning 3.3% of out-performance each year over 10 years than ANZ well exceeds the 1.24% of average assets that Milford collected in fees in the latest year, even though its fees were significantly higher than 0.83% of ANZ's average assets.

In dollar terms, Milford's average member paid $900 in fees and had an average balance of $75,900 at March 31, while ANZ's average member paid $219 in fees and had an average balance of 28,300.

ANZ's default fund, which was closed to new members in December 2021 after it lost its default status, charged an average $288 in fees, or 0.67%, on an average balance of $46,200.

Milford's average balance has grown 37.5% from $55,200 five years earlier, while ANZ's average balance has grown 73.6% from $16,300 over that period. The average balance in the default fund has grown to $46,200 from $18,200 over the five years.

Fisher Fund's oldest KiwiSaver fund charged 0.93% in fees while the former Kiwi Wealth scheme charged 0.84%.

Milford wasn't the biggest fee charger in percentage terms – MJW showed Booster charged the same 1.24%, Generate charged 1.25%, Christian charged 1.33% and Always-Ethical, which prohibits investment in interest-earning assets, charged 1.81%, although the latter is a very small fund with $73 million in total assets.

Performance boosts Generate

Generate's growth fund was the best performer in the latest year with a 20.3% return and was third over three years with a 5.9% annual return and second over 10 years with a 9.6% annual return.

Generate is now the eighth largest provider with nearly $5.3 billion in FUM, up from nineth last year, and experienced the fifth largest increase in FUM of $1.54 billion in the latest year.

SuperLife, which is managed by NZX's Smart, was the lowest fee charger at 0.16% of average assets, or just $36 in the latest year in dollar terms. It's average member balance at March 31 was $25,700, down from $29,400 five years earlier.

Its returns haven't been great with its growth fund ranked 10^th out of 15 in the latest year with a 14.9% return, 8^th over three years, 14^th over five years and 12^th out of 13 over 10 years.

InvestNow's fees at 0.18% of average assets also look low, although it is a platform providing access to other managers' products which have fees included.

Simplicity, now the 10^th largest provider with $4.02 billion in FUM at March 31, is another low charger at 0.28% of average assets and $79 on average per member, with an average member balance of $31,000, up from $29,000 five years ago.

MJW calls Simplicity “a vocal disrupter of the KiwiSaver industry” since its launch in 2016 because of its focus on reducing fees.

So far at least, its mostly index-tracking management style is paying off for members with its growth fund ranking 5^th best performer out of 15 in the latest year and a return of 17.4%, and it ranked fourth over three years and third over five years.

The last sentence has been corrected to show Simplicity was third over five years.