Can you retire wealthy by choosing the right Kiwisaver fund?
In May 2019, I wrote an article about Kiwisaver, showing that, at the end of a working lifetime (40 years), a given initial sum invested in a Kiwisaver growth fund could eventually be worth several times as much as the same amount invested in a conservative fund. This was based on the average growth fund having a 10-year growth rate of 10.9 percent a year, and the average conservative fund having a growth rate of 6.6 percent. In the short term, the effect of these differential growth rates would be modest, but compound growth over a long period would result in the effect becoming massive.
Disclaimer: This article is not intended to be presented as financial advice. It should be remembered that past performance of investment funds is not necessarily a guide to their future performance, and that the value of funds can go down, as well as up.
This article demonstrates that, in terms of growing wealth, the choice of provider within most fund types can be as important as the choice of fund type itself. The calculations are based on the most recent data from the latest Morningstar Kiwisaver Survey.
The table below shows the average 10-year growth rates of different types of funds. Within each type of fund, there are different numbers of funds, although some providers have more than one fund of a particular type.
It indicates that there is a considerable difference between the fund type with the highest average growth rate (i.e. growth funds) and the type with the lowest (i.e. conservative funds). However, it also reveals that there are large differences in the growth rates within fund types. Indeed, in the case of both the balanced and aggressive fund types, the percentage point difference between the highest and lowest performing fund is greater than the difference between the highest and lowest performing fund types. The differential between the highest and lowest balanced fund types (growth vs conservative) is 3.6 percentage points. But the differential within balanced funds is 3.9 percentage points, and the differential within growth funds is 4.9 percentage points.
| Fund type | Number of funds | Fund average | Highest | Lowest |
|---|---|---|---|---|
| Conservative | 9 | 5.9 | 7.0 | 4.9 |
| Moderate | 13 | 6.4 | 8.1 | 4.9 |
| Balanced | 18 | 8.0 | 10.1 | 6.2 |
| Growth | 19 | 9.5 | 12.5 | 7.6 |
| Aggressive | 6 | 8.9 | 9.7 | 8.1 |
Source: Morningstar. Note: table excludes funds that do not have a 10-year record.
The effect of choosing the right type of Kiwisaver fund and the right provider can be illustrated by some calculations based on simple assumptions. The calculations assume that a moderate earner starts with an initial $1,000 Kiwisaver investment at the beginning of their 40 year working career and adds $3,500 to their fund each year in the form of employee and employer contributions. This person has no other investments.
Choosing a growth fund, instead of a conservative fund, could make someone 2.6 times as wealthy at the end of their working life.
If this investor were to invest in a conservative fund that maintained the same 5.9 percent annual growth as the average (shown in the table above) for this fund type, their fund would have a value of $534,646 at the end of 40 years. However, if they chose a growth fund that maintained the same 9.5 percent annual growth rate as the average for this fund type, their fund would have a value of $1,387,039 at the end of 40 years. In other words, choosing a growth fund, instead of a conservative fund, could make them 2.6 times as wealthy at the end of their working life.
Choosing the highest growth provider within a given fund type, rather than the lowest, could eventually make someone between 1.5 times and 3.8 times as wealthy.
The same sort of calculations can be done to show the effect of choosing the highest performing fund within each fund type, rather than the lowest. The results are presented in the next table. It indicates that, because there are large differences between the performance of the highest and lowest performing providers, the terminal value of the same investment pattern can, over a long period of time, be very different. Choosing the highest growth provider within a given fund type, rather than the lowest, could eventually make someone between 1.5 times and 3.8 times as wealthy.
| Fund type | Highest performer | Lowest performer | Ratio of highest to lowest |
|---|---|---|---|
| Conservative | $710,197 | $415,900 | 1.7 |
| Moderate | $949,950 | $415,900 | 2.3 |
| Balanced | $1,635,226 | $577,259 | 2.8 |
| Growth | $3,193,271 | $831,648 | 3.8 |
| Aggressive | $1,465,062 | $949,950 | 1.5 |
Source: BERL - see assumptions and data described in the text.
Again, it is cautioned that the past performance of an investment fund is not necessarily a guide to future performance. But the takeaway from all this is that it's worthwhile everyone keeping an eye on their Kiwisaver fund and consider whether they are in the right type of fund and using the right provider. Data to help answer these sorts of questions is available, but anyone in doubt should consult a qualified financial adviser.