Global exposure benefits KiwiSaver as dollar falls

KiwiSaver fund managers are increasing their offshore exposure allocation as global funds perform better than other fund categories this quarter, new research shows.

NZX-owned researcher FundSource has released its September quarter research into KiwiSaver performance, which shows those with 100% investment in global shares – which accounts for just a small proportion of KiwiSaver funds – experienced average performances of 5.8% over the quarter.

The strongest performing diversified funds are in the growth category invested in offshore companies, returning an average 3.6%.

The next highest allocation to global shares was in the balanced category with performances averaging 2.9%, followed by default (2%) and conservative (1.8%) categories.

Sam Stanley, NZX head of exchange products, told NBR ONLINE that funds that have a higher asset allocation to global equities have done better than those with a lower exposure due to the depreciation of the kiwi dollar against offshore currencies, which he says is likely to continue.

However, members should not rush to switch their funds to global funds, as it depends what hedging strategy a manager has  as to whether the fund will do well from a continuing depreciating kiwi dollar.

“If the strategy is completely unhedged, and the kiwi dollar continues to depreciate, then the fund will continue to do well. Some managers prefer to be fully hedged, which would not benefit from a further depreciation of the kiwi. A popular approach is to be 50/50 hedged, which takes an agnostic approach on the strength of the kiwi dollar,” Mr Stanley says.

FundSource noted an increase towards asset allocation in global equities in September, but in June saw a decrease.

“The consensus out there – and certainly my view – is that the kiwi dollar is still grossly overvalued,” Mr Stanley says.

“The actual performance of the offshore market is pretty similar to the local market but the foreign exchange has made a big difference.  We never give advice on things like this but people can make their own view; if they know their manager is unhedged in the currency and they have a view that the New Zealand dollar will continue to depreciate, then it would make sense for them to stay in that fund, or invest in a fund that is unhedged.”

Overall, fund performance was steady from the June quarter to the September quarter, however average balance reached more than $10,000 for the first time.

September quarter inflows were $1.4 billion, significantly higher than the June quarter inflows of $780 million, which Mr Stanley said was the anticipated yearly boost due to eligible members receiving their $500 tax credit.

KiwiSaver membership is now at 2.34 million, having grown 20,000 in the last quarter.

The balanced fund category attracts about 40% of inflows but Mr Stanley says what is interesting this quarter is there are higher amounts of people de-risking from growth funds into balanced funds. “This probably reflects KiwiSaver is seven years old and more people are nearing retirement age and want to decrease the risk of growth assets.”

This quarter was the first time FundSource looked at the new default funds – run by BNZ, Grosvenor, KiwiWealth and Westpac – and found these had stronger performances and inflows than their peers in the conservative category.