Depending on your KiwiSaver provider, your KiwiSaver funds can be actively managed or passively managed. Actively managed funds are where investment managers make active decisions on what investments to buy or sell in your KiwiSaver. On the other hand, passive investments copy what the market is doing by tracking and buying the index.
Ongoing fees for actively managed funds are generally higher than those for passively managed funds. Are the higher costs of active funds worth it?
Let’s take a more detailed look into these two different investing styles to answer that question.
Actively Managed KiwiSaver Funds
If you’re in an active KiwiSaver fund, your investment manager buys and sells investments with the intention of beating stock market returns. This requires deep analysis, expertise, and monitoring companies from a corporate governance point of view.
One of the advantages of actively managed KiwiSaver funds is having greater flexibility in choosing what your money is invested in. Investment managers can also manage risk by avoiding companies with red flags. Moreover, actively invested funds tend to be popular during market upheavals as fund managers can take advantage of more buying and selling opportunities and guide investors through wild market price fluctuations.
Disadvantages of actively managed funds are that they charge higher fees due to the more hands-on investing approach and that they take on active risk. It’s also important to reiterate that not all active managers are successful all the time, or even most of the time. Your KiwiSaver provider claiming to be active does not guarantee you will do better than passive funds or the market.
Passively Managed KiwiSaver Funds
Passive KiwiSaver funds follow what the market is doing by tracking and buying the index. This index or benchmark measures the overall performance in a market and can represent an economy as a whole. Examples are the NZX 50 and S&P 500 indices which measure the performance of the 50 largest traded companies in NZ and the 500 largest traded companies in the US.
Advantages of a passive management style are lower fees and transparency in what your fund invests in. Disadvantages are that there are limited indices and that net return will always underperform the market because of trading costs and fees.
Weighing the Options
After weighing out the pros and cons, it would seem that active funds allow your KiwiSaver account to generate returns greater than passive funds. However, as mentioned before, that is not guaranteed. If you are choosing an active KiwiSaver fund, you will need to dig deeper to see what the investment policies of the funds are, and the skills and experience of the people actually managing your money, etc.
Additionally, don’t make a decision on active vs passive just based on fees. Fees can pay for more than simply investment management – they can be used to pay for additional services such as access to financial advisers, financial planning software, and research on ethical investing. These services may bring more value for KiwiSaver members and their long-term financial objectives.
Is Active or Passive Better?
Rather than trying to answer that question, at National Capital, we answer the question – what is better for you? Depending on your financial situation and goals, both active and passive funds can get you to where you want to be - so it's more a question of finding which one suits you best.
To answer that question, we need to get to know you. We need to understand factors such as your investment timeframe, your volatility tolerance, and the weekly amount needed to help you live your desired retirement lifestyle. Based on that we can create a KiwiSaver strategy for you, and only then decide whether it's an active or a passive fund which will help you get there.
Take National Capital’s KiwiSaver HealthCheck to find out which KiwiSaver fund will work best for you. You could end up saving thousands more at retirement!