Should KiwiSaver Providers Change Up Their Investing?
If we want our KiwiSaver balances to grow faster, we need better returns. John Berry puts forward the argument for KiwiSaver providers putting money into a wider range of investments.
6 October 2021
In KiwiSaver, time is your friend. Investment returns are expected to be higher and more stable over longer time periods.
Interestingly, most KiwiSaver investors do in fact have a long horizon – more than three-quarters of those enrolled have at least 10 years until they turn 65.
This longer horizon means that, unless they’re close to buying their first house or retiring, investors should consider a growth fund rather than a conservative fund.
That’s because a growth fund will have more investments that are potentially higher-return, even if they are higher-risk. If you have many years of investing ahead, you can probably weather some bad years among the good.
How to get higher returns
For higher-risk and higher-return investments, most people think of investing more in shares and less in cash and bonds. But there are other assets that could make sensible higher-risk additions to a growth KiwiSaver.
We should add these to the list of investments: commodities (raw materials and resources) and hedge funds (aggressively managed funds using many trading techniques).
They can both be useful as part of a diversified growth portfolio, because of their potential long-term returns. Also, their values typically go up and down at different times to global share markets. If the market’s down, these assets may well be stable.
Investing in businesses
Another alternative asset with a high potential for great returns is private equity, which is investment in unlisted companies.
When KiwiSaver was set up in 2007, an expected side-benefit of the scheme was that it would offer capital to small-to-medium sized businesses (SMEs) in New Zealand.
But, no. This simply hasn’t happened – with very few exceptions, KiwiSaver providers have avoided investments in private equity.
This is a great disappointment, because unlisted companies have a history of delivering high returns.
They can be hard to access as investments, so private equity is usually only available to sophisticated wholesale investors.
This is, in part, because private equity assets can’t be sold at any time, unlike a listed share.
Returns of 15-20 per cent
Local private equity investments often deliver 15 to 20 per cent a year over long periods.
It’s a similar story in Australia, where consultants Cambridge Associates calculate private-equity funds have beaten the listed market by 6 per cent a year over the past 15 years.
Investing in unlisted companies gives investors access to smaller and potentially higher-growth companies that can be hard to access through the share market.
In New Zealand, there are very few growth businesses among our top share market-listed companies. In fact, there are only two in the top 10 – A2 Milk and Fisher & Paykel Healthcare.
Compare this to the US, where the country’s top 10 is dominated by growth companies – Apple, Microsoft, Amazon, Facebook, and Alphabet (Google).
Unlisted growth companies offer the chance of higher returns than New Zealand’s large listed companies provide. This means that allocating some KiwiSaver money into private equity could be good for long-term growth investors, even if it comes with higher risk.
Business would benefit
A great side-benefit of this type of investment is that more money would pour into unlisted growth companies, driving new industries and technologies – and creating more jobs for New Zealanders.
The total value of cash in KiwiSaver has gone from zero in 2007, to about NZ$50 billion now. That’s staggering growth, made up in part from individual (and employer) contributions, partly from government tax credits, and partly from investment returns.
To help drive future long-term KiwiSaver growth, we need fund managers to include alternative assets along the lines of hedge funds, commodities, and private equity.
The average KiwiSaver account balance is just NZ$17,000. I’d expect that long-term investors with this amount saved want growth assets so their account builds to many times that size when they retire.
First published 28 November 2018
Story by John Berry
John Berry is co-founder and chief executive of Pathfinder Asset Management, a boutique responsible investment fund manager. He is also an independent director of Punakaiki Fund Limited, an investor in New Zealand growth-stage companies.
Commodities: Raw materials, energy or agricultural products that can be bought and sold. Examples include oil, gold, aluminium, wheat, and timber.
Diversified portfolio: Diversifying is about having a wide variety of investments, which reduces your risk. It’s about not having all your eggs in one basket.
Hedge fund: An aggressively managed fund that may trade often or invest with complex strategies, including techniques taking advantage of both rises and falls in markets.
Private equity: Investment in private companies that are not listed on a stock exchange.
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