KiwiSaver funds misclassifying risk: Research

Some KiwiSaver providers are incorrectly indicating the risk category of their funds, new research shows.

Friday, May 1st 2015, 6:00AM

by Susan Edmunds

The research by Randall Clement, with Henk Berkman and Annie Zhang, recently won an FMA research prize.

It is due to be published in the journal New Zealand Economic Papers.

Sorted, FMA and Morningstar all rank funds according to their risk in a way that is designed to be accessible to consumers.

But the researchers said there were substantial differences in their thresholds for exposure to growth assets.

A fund with 45% growth assets is considered conservative by the FMA. But Morningstar requires a conservative fund to have no more than 20% exposure to growth assets.

The research found that some funds’ self-reported risk categories were incorrect.

Some funds within the moderate-balanced and balanced peer groups exhibited volatility similar or greater than the average volatility of growth funds.

The researchers did not want to identify the providers in question but said a clearer risk classification system would help investors.

“Many investors are only willing to accept low-to-average risk and invest in conservative or balanced funds. It is important for them that these funds have the correct risk indicator.”

Zhang said: “KiwiSaver might be their first time investing in the sharemarket or in a managed fund. If all the other funds perform as an apple and perform within a band but one apple performs as a banana, it shouldn’t be able to advertise as an apple.”

The FMA said the research prize, open to students completing a master’s thesis or honours dissertation, had been awarded to two students so far. Winners receive $1000. Nick Barry, from Victoria University, was the other winner, for his thesis on information leakage and abnormal trading prior to earnings announcements.

Tags: KiwiSaver