Fidelity KiwiSaver fund hurt by market volatility

One of Fidelity Life's KiwiSaver funds is being buffeted by the same global financial forces which forced the liquidation of the $75 million NZDX-listed Fidelity Capital Guaranteed bonds last week.

Monday, August 15th 2011, 5:00AM

by Jenny Ruth

Fidelity's options KiwiSaver fund uses the same strategy which includes writing put and call options on New Zealand, Australian and US government bonds.

Its unit price dropped to $3.8045 on August 9, the latest price available, from $4.1331 a day earlier and $4.8859 on July 29. That's a 22.1% drop since July 29.

By contrast, over the same period, Fidelity's aggressive KiwiSaver fund has seen its unit price fall 11.4% from $2.8057 to $2.4859 while its conservative fund has eased just $2.3% from $5.9572 to $5.8227.

The options KiwiSaver fund has been a strong performer. In the year ended July, its unit price rose 20.9% and it is 39.8% higher than at the end of July 2008.

Fidelity's aggressive fund's unit price rose 5.8% in the year ended July but is only 2.6% higher than in July 2008 while the conservative fund's unit price fell 3% in the year ended July but is 8.5% higher than at the end of July 2008.

Fidelity chief executive Milton Jennings says while the KiwiSaver fund is following the same strategy as the bonds, it's structured differently from the bonds and isn't forced to start closing out contracts as the bonds did when they approached their floor set by a complicated formula.

That means the KiwiSaver fund can hang on in the hope of recovering when financial markets stabilise.

"When you write options and you get this extreme volatility that we've seen in the last couple of weeks, the premium you get escalates the income you earn from writing options - it's probably three or four times you would have got prior to this volatility occurring," Jennings says.

Nevertheless, "we would prefer not to have it (the volatility)."

Jennings says he expects it will take a few months for the options fund to recover. "Equity markets tend to take even longer to recover some of their losses."

Bondholders will receive no more interest although they will get their capital back in mid-2013 because they are capital guaranteed by Westpac Bank.

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