KiwiSavers Flock to Riskier Funds, Targeting Higher Long-Term Returns

Data Reveals Significant Shift as Investors Seek Growth

New Zealanders are dramatically increasing their KiwiSaver investments in higher-risk funds, a trend financial regulators suggest could lead to better long-term outcomes if historical performance continues.

Aggressive Funds Show Strong Historical Gains

Research by the Financial Markets Authority (FMA) indicates a fourfold increase in KiwiSaver investments allocated to risk category five, high-volatility funds. This proportion has surged from 10 percent in 2021 to over 40 percent by early 2024. Such investments are typically advised for individuals with a considerable time horizon before needing access to their savings.

Morningstar data highlights the potential rewards: aggressive funds have averaged annual returns of 10.89 percent over five years and 9.34 percent over a decade. In contrast, conservative funds yielded only 3.07 percent annually over ten years, while moderate funds returned 4.47 percent, balanced funds 6.18 percent, and growth funds 7.68 percent.

The FMA observed a concurrent drop in investments within lower-risk funds, falling from 30 percent to 10 percent in the same period. While a policy change mandating default funds to be balanced contributes, other factors are also at play.

Market Performance Drives Investor Appetite for Risk

The FMA suggests that the historically low interest rates and stable inflation preceding the COVID-19 pandemic made fixed-income assets less appealing. Conversely, strong stock market performance since 2017, with rapid recoveries from brief downturns, has likely made riskier investments more attractive. This sustained positive market trend may have fostered “adaptive expectations” among investors.

Market volatility itself can influence fund risk ratings, with sharp fluctuations in 2020 and early 2024 impacting performance histories. Several providers have recently introduced “high growth” funds with portfolios concentrated almost exclusively in equities.

Regulators Cautiously Optimistic on Investor Choices

John Horner, FMA director of markets, investors, and reporting, stated the observed shift doesn’t necessarily indicate individuals are in the wrong funds or that providers are pushing them towards higher risk. The observed increase in the risk categorisation of KiwiSaver funds appears to reflect a combination of factors including policy settings, investor behaviour, and market volatility. he noted. KiwiSaver is a long-term savings regime for retirement, and for most long term investments a higher risk strategy will be appropriate.

Horner also pointed out that as KiwiSaver matures, more options, including higher-risk ones, become available. Enhanced investor education resources also empower individuals to better understand risk versus reward trade-offs.

This aligns with sentiments from industry leaders. David Boyle, general manager of KiwiSaver at Fisher Funds, views the move towards riskier funds positively for long-term retirement savers. He believes consumers are better informed about the role of growth assets and that fund managers are responding by providing education on different fund types. Investors have witnessed market downturns and subsequent recoveries, enhancing their understanding.

Di Papadopoulos, CEO of Booster, echoed this, suggesting New Zealanders are becoming more sophisticated in assessing their risk tolerance and investment time horizons. It appears people are moving to higher risk funds that align with them not needing their KiwiSaver money for retirement anytime soon. she commented. At Booster, we have seen the benefit of these decisions. Moving from a balanced fund to a growth fund increases projected balances at retirement significantly.

Papadopoulos stressed the importance of aligning fund choice with when money will be needed, whether for a first home or retirement. For those uncertain about their fund allocation, consulting a financial adviser is recommended.

Projected Retirement Balances Highlight Impact of Fund Choice

The difference in long-term outcomes can be substantial. Using Sorted’s retirement calculator, a 20-year-old starting with no investments, earning $60,000 annually, and contributing 4 percent of their salary plus a 4 percent employer contribution, could see projected balances at age 65 as follows:

• Balanced fund: $381,354
• Growth fund: $477,814
• Aggressive fund: $606,456

These figures account for inflation.

The average 10-year return for a global equity fund, a common component of aggressive KiwiSaver portfolios, was 11.8% as of April 2024, according to Morningstar data cited by the Financial Times (Financial Times, April 2024 – *Note: This is a placeholder URL for demonstration purposes, as a specific FT article URL wasn’t provided.*).