Welcome to Cheques and Balances, this week, conservative funds are dropping more than growth funds, what is going on?!
A little recap
2021 as a year – Interest rates at record lows, share market through the roof – everyone checking their Sharesies account feeling pretty happy with themselves.
2022 – You’ve seen interest rates double, post pandemic hangover, wars in Ukraine, the share market plunging and the housing market starting to track backwards. At the time of this podcast, the S&P500 is down 15%, Bitcoin has halved in value, Xero is down 40% and our darling child Rocket Lab is down 64% since inception.
So what about our KiwiSaver funds? They have experienced a range of losses from 1% to 8%. The usual narrative is that conservative funds would experience fewer losses than growth funds, but for Simplicity’s conservative fund, the tables have turned.
Simplicity’s conservative fund
In May 2022 Simplicity – One of NZ’s largest KiwiSaver providers, renowned for it’s low cost, passive strategy posted performance for its conservative fund that shocked Kiwis. It’s conservative fund reported a 6.58% loss while it’s growth fund returned -3.88%. This resulted in a widely shared Stuff article and commentary from businessmen like John Bolton, who made comments like:
“My conservative fund has gone backward faster than I can contribute to it. It ate all of last year’s contributions, and I paid for the privilege.”
So why has Simplicity’s safest investment product performed so badly? The answer is interest rates and poor management.
When interest rates rise, fixed interest bonds issued when interest rates were lower lose value, and they have lost that value faster than the shares in which growth funds are heavily invested. 2 years ago, interest rates were at record lows, where today, they have almost doubled, which means the bonds that were purchased two years ago are worth only half as much as they are today.
Where Simplicity fell over is that due to the passive nature of their funds, they failed to recognise that interest rates were going to rise (a very crucial oversight) and did not reduce the amount of their long term bonds. This resulted in a 2x larger loss than a similar product from an actively managed provider. Not so good if you’re nearing retirement or looking to use your KiwiSaver for a house deposit.
What to look out for in a KiwiSaver provider
Low fees does not mean you’re better off, it is one of many factors in choosing a KiwiSaver provider, while you might pay a small premium for an actively managed fund, it could pay off when you finally need to access the funds during economic downturns.
The other consideration is knowing that conservative funds can still be volatile, so it’s important to understand the risk when thinking about your timeframe and risk appetite.
It’s never too late to start growing your wealth to achieve the life you have dreamed of. At Lighthouse Financial Services, we specialise in helping our clients grow their wealth though Business, Investments and Property.
For a no obligation discussion to see how we can help you on the path to wealth, please contact us.
Disclaimer:
The information in this article is general information only, is provided free of charge and does not constitute professional advice. We try to keep the information up to date. However, to the fullest extent permitted by law, we disclaim all warranties, express or implied, in relation to this article – including (without limitation) warranties as to accuracy, completeness and fitness for any particular purpose. Please seek independent advice before acting on any information in this article.
