kiwisaver, volatility

Coronavirus update - what is your KiwiSaver provider doing?

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In the previous article I wrote about Coronavirus and KiwiSaver, my message was as long as you are invested in the appropriate fund, the best course of action for you will be to do nothing!

But does that mean your KiwiSaver fund manager should be doing the same? No, not really.

If your KiwiSaver fund is actively managed, then your fund manager should not only be taking steps to protect the portfolio but also take advantage of the current and expected volatility caused by the 'Corona virus effect' and a possible recession.

So are the fund managers trying to predict the market? I hope not! While it is difficult (and some would say impossible) to predict what the broader market will do, it is possible to take advantage of price drops in particular industries and companies. And that's what your fund manager is paid for.

As part of our research and monitoring efforts, we get in touch with KiwiSaver fund managers and stay updated on what they are doing to get the best results for National Capital clients.

What is your provider doing?

We asked the KiwiSaver providers we work with what their response and strategy to the current state of affairs was. Here are some of the answers (edited for brevity).

ANZ: While a good amount of uncertainty remains, equity valuations are becoming more attractive, and on the contrary, bond prices, on a valuation basis, are looking expensive. Furthermore, sentiment is extremely negative. While this does not rule out further declines, it can often mean buying opportunities are close, which we are closely monitoring.

Milford: We adopted a cautious approach prior to this period of volatility and during early February reduced exposure in the funds to key sectors likely to be affected by the economic impact of the virus. We have low relative exposure to sectors such as oil, banking, travel and tourism. Whilst not immune to the volatility, our defensive positioning with significant cash holdings allows us to cushion the impact and to respond to buying opportunities as they arise.

Generate: We held elevated levels of cash going into the sell-off. For instance, at the end of January Focused Growth Fund had 10.8% and the long-term target is 5%. These elevated cash holdings dampen down the impact of the share market dip and also allow the funds to take advantage of the weakness, i.e. buy shares at attractive prices. The volatility is to be expected to continue in the short term. Generate has begun to cautiously increase our investment in companies that are unlikely to be materially impacted by the Wuhan Coronavirus but have experienced significant declines in their share prices nonetheless.

Aon: We view the corona virus partly as a catalyst that uncovered risks and issues that were already in the system. (Prices at extremes, earnings falling, debt increasing). We consider the manager attitude and ability to control risks in our selection and monitoring processes. While the virus itself wasn’t predicted the fund managers expected behaviour in extreme market stress is considered. Our fund managers responded to the recent volatility in various ways, including managing downside risk with options protection strategies and, with a longer term view, taking the opportunity to buy good quality companies when stock prices fell to more attractive levels.

CareSaver: We have built higher cash position across our portfolios and we will re-invest this when we have a better understanding of what the corona-virus might lead to. Second, we have a defensive bias to our portfolio, such as real estate investment companies, utility companies (these usually go down less in falling markets). Third, we use our currency positioning to protect our assets. The fall in the New Zealand dollar recently versus the US dollar from 65 cents to 62 cents has buffered some of the downwards move as we are under-hedged. 

Booster: The most affected areas have been related to tourism. However, we have little global exposure to airlines or tourism related companies. In NZ shares, we have a reduced holding in Air New Zealand and we don’t hold campervan rental operator, Tourism Holdings. Both declined 10-20% over the last few weeks. Overall, we don’t know yet when this epidemic will run its course. While we can’t understate the tragic impact on individuals, families and communities, history suggests that any economic and stock market impact won’t be long-lasting.

Fisher Funds: While the move down in share prices in recent days has gone some way towards improving the long run valuation arithmetic of the market the full extent of the coronavirus is yet to be seen. Valuations for the sort of companies we would look to buy on a panic induced sell off are not outstandingly cheap. So while shares are more attractive than they were, we think patience is warranted.

What does the above means in layman terms?

Overall, the gist is that as long as you stay put, this volatility can actually mean greater returns in the long term for you as your KiwiSaver manager takes advantage of buying opportunities. Your KiwiSaver balance might drop in the short term, but in the long term it will come back and come back stronger!

So what should you be doing?

If you're a client of National Capital, we have ensured you are in a KiwiSaver fund which takes into account your volatility capacity and goals. So you don't need to do anything.

If you are not a client and are waiting for the 'right time' to get your KiwiSaver sorted, that time is now!

 

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