Concern at conservative fees

Many conservative KiwiSaver funds aren’t delivering returns to justify their fees, Morningstar’s co-head of fund research says.

Thursday, July 31st 2014, 6:00AM

by Susan Edmunds

The firm released its KiwiSaver survey yesterday, which is designed to help investors assess the performance of their KiwiSaver options.

Morningstar Australasia co-head of fund research Chris Douglas said global markets had bounced back in the quarter and the best-performing sectors were outside New Zealand.

"This again illustrates the importance of a well-diversified portfolio, as KiwiSavers in domestically-focused schemes will have lagged."

Aon KiwiSaver Russell was the strongest performer in the balanced and conservative categories, while AMP KiwiSaver Lifesteps came out on top in the growth-oriented categories of growth and aggressive. Milford topped the league table in the moderate category.

But the report made note of fees.

Douglas said he was concerned that fees for conservative funds were high compared to the returns they were generating.

The survey showed a total expense ratio (TER) for conservative funds of 1.05%. Douglas said, considering those funds were aiming for mid-single digit returns, “there’s a meaningful chunk out of that performance the investor receives. I do worry about that.”

He said Morningstar paid attention to fees because they were the one constant that could be controlled. Over time, higher fees would erode performance outcomes.

Douglas cited the AON cash fund, charging 90 basis points, and Staples Rodway charging 1.19%. “Staples Rodway returned 3% and charged a 1.2% fee, the reality is there’s $19 million in there, it’s not a lot of money, but that’s pretty pricey.”

He said most KiwiSavers did not understand the fees they were paying. "If you look at the conservative peer group, there’s a number of funds charging more than 1%. That’s a very high fee to be paying for mid-single digit returns.”

Douglas said there was a risk that investors would realise after a number of years that they had been paying a high fee and had not had the returns they expected. "They’ll have had a bad experience and we hope they would leave and go to a better option, It’s the same thing as buying a car or anything but it’s more significant with KiwiSaver because it’s your retirement savings, you want to save as much as you can, every basis point counts.”

But he said there was choice available – ASB’s conservative fund’s TER is 0.34%.

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