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To Achieve "Conservative" Returns, What Advantages Does KiwiSaver Offer?

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Mary Holm
Mary Holm


The KiwiSaver question uppermost in my mind
has been "I want a conservative return, so why can't I just invest in a
bank deposit account like ASB's Fastsaver, (which currently returns 8
per cent at call), or 90 day bills?"

Instead I have to
deal with some provider, who takes fees from me, and - judging by
recently published performances - can't seem to produce any profit at
all. Are there any alternatives?


Mary Holm: Several. And you'll do a lot better than in a bank savings account, with equal risk. The only downside is that your KiwiSaver money is tied up.

But first, let's look at why returns, even on conservative KiwiSaver funds, have been so bad. The typical conservative fund invests mostly in cash and bonds - usually government bonds and high-quality corporate bonds - with a smaller proportion in shares and perhaps property.

This normally works well. If either the bond or share market falls that is frequently offset by a rise in the other market. But not so in the first three months of this year.

"This quarter was one of those unfortunate, but thankfully rare, periods when both equities (shares) and bonds fell in value concurrently," says Cameron Watson, ABN AMRO Craigs chief investment officer, in a recent publication.

Global uncertainties led to sharp declines in New Zealand and overseas shares. And "rising interest rates and widening credit spreads have pulled down the current value of corporate bonds," says Watson. The last time both markets feel to the same degree was back in 1994, he adds.

While the other assets in conservative funds - government bonds and cash - performed well, that wasn't enough to counter all the bad news. Most of the time these funds will do much better.

However, there's another type of KiwiSaver fund that is even more conservative. A survey I'm doing for an upcoming book reveals that about a dozen providers offer ultraconservative funds, usually called "cash funds" or similar.

Many are as secure as bank term deposits or close to it. And their returns, at first glance, are similar.

Seeing you've mentioned ASB, let's look at their two cash funds. Returns were 4.1 per cent and 4.2 per cent for the six months ending March. That's an annual rate of more than 8 per cent - topping Fastsaver.

But wait, there's more. It's important to remember that KiwiSaver returns are on all the money - not just your contributions but also the government's kickstart and, if you're an employee, your boss's contributions. And once the first tax credits are deposited - probably around August or September - you'll get returns on that money, too.

Let's say you put in $2,000 and others put in $2,000, and the return on the $4,000 is 8 per cent before fees and tax. That comes to $320. But if you look at $320 on just the $2,000 you put in, that's a 16 per cent effective return. In some cases, other contributions will be higher than yours, pushing your effective return up even more.

And that's effective return is what you should compare with bank account interest.

It's true that you have to pay KiwiSaver fees, but there is a fee subsidy, and tax is lower for many people in KiwiSaver. Together, these factors won't nearly cancel out the advantages of government and perhaps employer contributions.

KiwiSaver cash funds aren't for everyone. Riskier funds are sure to bring higher average returns over the long term, despite the unusually bad recent performances.

But if you can't cope with market volatility, a cash fund is the way to go.

Mary Holm is the author of bestselling books on KiwiSaver and personal finance. She is also a highly praised seminar presenter. Her written advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following that advice.   

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