How does your KiwiSaver provider compare to others in how they invest your KiwiSaver money?
“No two KiwiSaver schemes are the same” is a concept we have mentioned numerous times on this blog. However, we understand that some people want to see what the differences between schemes are when we look at the nitty gritty.
So to illustrate this, this blog post will show how three different KiwiSaver providers invest your KiwiSaver money. And as you’ll see from this post, the investment processes of different KiwiSaver providers are most certainly not the same.
Different KiwiSaver providers being compared
The three different KiwiSaver providers shown below have been picked to demonstrate the variety between different schemes. They are as follows:
- Milford Asset Management
1. Milford Asset Management
Milford Asset Management (or simply Milford) follows an active investing process. This means that they choose what they invest in with the intention of trying to find lots of the future “winners”, while avoiding all the “losers” in the stock market. Their approach aims to take advantage of favourable opportunities when they come up, and minimise downside risk if markets are not favourable.
Milford “considers a multitude of factors” when deciding which investments to make. They assess the economic backdrop, the valuation of different assets, and what the potential future holds for the companies they invest into.
On their website, they disclose their approach for all to see in their Statement of Investment Policy Objectives (a handy diagram of this approach can be shown here).
Their investment processes diagram in their SIPO (click here to see it) shows a multi-step investing process. There is a whole heap of investments that Milford could choose from. And through a thorough process, they whittle down this big heap into a handful of assets they will eventually invest into. To do this, they “interact with hundreds of companies each year” to decide where their client’s money should and should not be invested.
Milford starts off by doing something called “negative screening”, which means they will exclude investments that do not meet certain criteria. In this case, they exclude companies that are in the business of anti-personnel mines, recreational cannabis and tobacco, just to name a few. Milford is also a signatory to the United Nations Principles for Responsible Investment and the Responsible Investment Association Australasia, which further influences the way they invest. For more information on this, check out their exclusion list here.
After this, Milford does economic and investment analysis. This includes analysis of the wider economy, as well as specific analysis of the individual assets they wish to buy. They conduct their own proprietary research to do this.
Then, Milford holds investment forum meetings. This is where all the research they have done is brought together, and then presented to the portfolio managers. The portfolio managers will then debate the findings, and will have the final say as to which securities will be bought and sold.
Lastly, once the decision has been made regarding what to buy and what to sell, the relevant parties will execute these instructions in accordance with the portfolio manager’s wishes.
If you’d like to read more about Milford, click here to read our detailed summary about them.
JUNO is an actively managed KiwiSaver provider that came on the scene in 2018. JUNO is managed by PIE Funds, hence for this section we will be looking at PIE Funds’ investment process.
The manager of JUNO aims to generally buy assets when they’re cheap, and sell them when they’re expensive. There is no rigid formula for figuring out what makes an asset “cheap” or “expensive”, and PIE Funds mention this on their website. They also believe that “active investors can achieve above-average market returns”.
On their website, PIE Funds says they aim to minimise unnecessary volatility and investment draw-downs, while seeking returns. Investment draw-downs are the difference between an asset’s peak value at a period of time, and an asset’s lowest value (i.e. a trough) after reaching that peak value. This can be illustrated by the diagram below, where I used Google's stock market charts to help illustrate this concept.
PIE Funds says it has four key stages to its investing process.
The first stage is “Identify”. According to PIE Funds’ website, when looking for companies to buy, they look for ones which possess:
- High quality management
- Competitive advantage
- Profit and revenue growth
- Industry tailwinds
- Low gearing ratios
- Strong cash conversions, and
- Large reinvestment opportunities
The second stage is “Research”. To do this, PIE Funds talks to well informed people in the market as well as the management team of the companies they invest in. Based on this research, they may change what or how much they invest in something.
PIE Funds values businesses in many ways. A few factors they take into consideration are what they forecast a company’s future financials to look like and the relative performance of similar types of companies.
The third stage is “Construct”. To construct an appropriate portfolio, the managers of JUNO will buy more of the assets they think have a high chance of providing a high level of return. PIE Funds does not actually limit how much money it can hold in cash. This may be because they want to have spare money on hand for when they see another great undervalued asset.
PIE Funds also actively protects against currency fluctuations and market risk. This is generally done with the intention to create more stable returns for investors.
The last stage of PIE Funds’ investing process is “Review”. This means that they will continue to evaluate their investments and decide whether they are investing their money in the right places. Examples of how they say they do this is by reviewing announcements, calculating portfolio weightings, and monitoring developments in the industry.
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Simplicity is different to the other two KiwiSaver schemes previously covered. This is because Simplicity’s KiwiSaver funds are passively managed which means they do not actively choose investments. Because of this, they don’t have a process of selecting individual assets to buy.
Simplicity chooses not to actively overweight or underweight any specific asset class. They instead choose to invest in a wide range and type of assets. As of the time of writing, their website says that their diversified funds are invested in more than 3,000 investments in 23 different countries overall. Because of this large level of diversification, if you hold money in one of their KiwiSaver funds, you will likely hold a share in many high returning investments. However, you will likely hold a share in many low returning investments too.
According to Simplicity’s Statement of Investment Policy and Objectives (also known as an SIPO), they believe “that markets are efficient”. So as a result, they have “adopted a predominantly ‘passive’ index approach to investing”. They believe that using index funds where possible decreases fees for investors, meaning investors will earn more money over time.
If you want to learn how an index fund works, please feel free to read this article here.
Many of the index funds that Simplicity put your money into are managed by Vanguard. Vanguard is one of the largest providers of index funds in the world. They have a wide variety of funds on offer, and many cost little in fees to invest in.
However, if Vanguard does not have a suitable index fund for a particular asset class, Simplicity will do their best to invest your money in a way that emulates that index. As a result, if hypothetically New Zealand shares earned 8% on average per year, Simplicity will also earn around 8% on the money they have invested in shares.
How does your provider compare?
Do you know how your provider invests your money?
If you have your money invested in one of these three different KiwiSaver schemes, the information we’ve given will help you find an answer to this question. However, most people will be with a different KiwiSaver provider.
The great thing about National Capital is that we’ve done lots of research into the different KiwiSaver providers. Our research is detailed and looks at various aspects of the different schemes on offer. We do this because we want to find the best KiwiSaver funds on offer for our clients.. And you can read more about how we do this, by clicking here.
The way we can advise you regarding who is the best provider for you is by filling out our KiwiSaver HealthCheck. It is simple and easy to do and by completing it, you’ll be able to talk to a real person about your financial situation. Best of all, the whole process is free!
The benefits of financial advice are enormous. New Zealanders that receive financial advice will on average receive 4% more per year in returns than a New Zealander who does not (source: Financial Services Council).
So why not get some free financial advice yourself by filling out our KiwiSaver HealthCheck today? Your future self will thank you.