Fees are not the full story
Fees are a cost, reducing your return over time. They are important - the difference between an annual fee of 0.60 per cent and 1.00 per cent on a $25,000 KiwiSaver is $100 a year.
That adds up but is not the paramount measure of success. It is actually your returns, and more importantly your returns after fees, that matter more.
Low-cost providers generally use passive investment strategies following a market index like the S&P500 in the US.
These indexes have the largest companies in a market, and as investments some will be good and some bad. The index is not picky about quality, it just likes to invest in bigger companies.
What if an investment fund did not invest in index companies that weren’t expected to perform well? And instead replaced them with smaller growth companies from outside the index? That is called active management and gives the opportunity to outperform the index.
The year to June 30 has been good for active management and tougher for passive. Morningstar’s data shows two of the largest passive index providers delivered returns of 39th and 42nd out of 61 funds in the growth category. Over a longer three-year period one of these outperformed the category average, the other underperformed.
Passive fees are lower than active manager fees, but the lower fee does not automatically translate into better investment outcomes. It is not lower fees that matter, but your returns after fees.
No one can run off with your KiwiSaver money
In KiwiSaver, your money is invested in a range of assets including shares and bonds. These go up and down in value, making your KiwiSaver balance go up and down.
The actual assets are not held by your bank or KiwiSaver provider, they are held by an approved independent company called a ‘custodian’. One of the main custodians is Public Trust, an organisation that is ultimately government-owned.
If markets fall, the investments in your KiwiSaver will likely lose value and your balance may drop. But no one can simply access and take your money, you can rest assured the custody structure provides safety.
A falling market has a silver lining
Believe it or not there can be an upside to markets going down.
Many property investors say “you make your money when you buy”, meaning you want to buy cheaply (admittedly very hard in this housing market). The same is true of KiwiSaver, it’s great to buy well.
Imagine you and your employer each contribute monthly into your KiwiSaver. If the market falls 10 per cent then you will buy the same stocks and bonds in your KiwiSaver as the month before, but you get 10 per cent more.
Think of it like buying the same shoes as last month but at a 10 per cent discount or going to your favourite restaurant and the prices are down 10 per cent on a month ago.
Markets can fall but recover – they’ve recovered from every crash over the last century including in 1929, the dotcom crash, the global financial crisis and the 2020 Covid-19 sell-off. Sometimes recovery takes a while, but if you have years until retirement then buying cheaper means your KiwiSaver has time to grow.
So there are our three things you may not have known about KiwiSaver but absolutely should know. Returns after fees are more important than just fees. Your KiwiSaver money is safe and no one can run off with it. And there is a silver lining to a falling market – the patient investor can buy cheaper.