Local bias sparks warning

A strong local bias in KiwiSaver and non-KiwiSaver investments is leaving New Zealand investors vulnerable in the event of an economic crisis, one fund manager says.

Wednesday, December 31st 2014, 2:25PM

by Susan Edmunds

KiwiSaver funds have a strong local investment slant.

According to the Reserve Bank, there is $10.6 billion of KiwiSaver funds invested in New Zealand assets, compared to $11.7 billion in offshore assets – a strong bias to New Zealand assets considering New Zealand represents just 0.1% of global sharemarkets by capitalisation.

Default funds with high cash and NZ bond balances affect the overall allocations.

Morningstar estimated that 27.4% of KiwiSaver allocations are to international shares while 13.2% is to New Zealand and Australian shares.

Pathfinder Asset Management’s John Berry said this was a clear indication of home country bias. “If all of New Zealand’s listed companies were combined into one mega-corporation, that company would still only rate as number 61 in the S&P500. There are 60 listed companies in the US alone that are bigger than NZ's entire market.”

But he said it was not uncommon to favour assets close to home. Concerns have been raised in Australia about self-managed superannuation funds investing only in Australian cash, property and equities. They are being encouraged to seek professional advice to reduce their concentration risk.

Berry said: “Investors in all countries tend to suffer a home bias – we naturally want to invest in what we understand and what is familiar to us.”

Berry said it created a potential risk for New Zealand savers. “In aggregate the KiwiSaver savings pool is overexposed to New Zealand cash, bonds and shares. Given we are such a small economy and investors are already exposed to the NZ economy through non-KiwiSaver investments, including housing, more diversification away from New Zealand risk would be sensible. If New Zealand was to face an economic crisis, many investors could suffer by having both their KiwiSaver and non-KiwiSaver eggs in one concentrated basket.”

He said if KiwiSaver investors were getting advice, the asset allocation of the $20 billion in KiwiSaver would look quite different.

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