How do we select the funds that we recommend to our clients?
There are more than 25 KiwiSaver Scheme providers with more than 200 KiwiSaver funds between them. Selecting the most appropriate providers and funds from among these to ensure that your hard-earned money is invested wisely is very important to us.
To achieve that, we have a robust and well defined KiwiSaver Investment Selection Process which is explained on this page. The process is based on five pillars whose intention is to help you build trust and confidence in your investments. These five pillars are Regulatory Oversight, Fees, Track record, Asset Allocation, and Performance.
A. Regulatory Oversight
The first pillar is perhaps the most vital. While the performance and fees of a fund are important, being regulated by a higher authority to ensure that the manager is working in your best interests is the first box that needs to be ticked.
All KiwiSaver scheme providers must comply with their obligations under the KiwiSaver Act 2006 (the Act) until they transition to the new regime. KiwiSaver providers must also comply with any obligations they have as issuers. Participants involved in KiwiSaver management and oversight must ensure they meet regulatory standards and act with customer interests in mind.
Additionally, KiwiSaver Scheme Trustees also have a responsibility as front-line supervisors for monitoring the management and administration of these schemes. KiwiSaver Scheme Managers must exercise care, diligence and skill in the investment of scheme assets, and act in accordance with the stated investment policy and objectives. The FMA monitors that KiwiSaver Schemes are compliant with their obligations. More information can be found on the FMA website here.
As KiwiSaver is a highly regulated product, National Capital focuses its KiwiSaver Fund selection on quantitative measures, rather than going into in-depth research of the processes and administration of the Schemes themselves. We believe our time and resources are better spent working with the clients to ensure they choose a fund with the correct asset allocation and educating them on the tenets of long term investing.
The second pillar is Fees. However, rather than just take the extreme view that fees are the only aspect you should consider when choosing providers, we base our selection on an expense ratio which takes into consideration both fees and performance of KiwiSaver funds. We do this by incorporating into our Investment Selection process KiwiSaver funds which have above-median returns and below-median fees. This allows our clients to be invested in funds which charge a reasonable fee while still delivering good returns.
We also understand that the fees charged by the KiwiSaver providers vary according to the service they provide such as active fund management, responsible investment funds and most importantly, access to Financial Advice.
As per an international study by Vanguard, access to Financial Advice can add up to three percentage points or more in net returns. Currently, schemes vary significantly in access they provide to a financial adviser for their members. We only work with and recommend providers who have access to Financial Advice as one of the services they provide. Schemes can do this either by paying a commission directly to us to provide advice to clients or allowing us to charge clients fees directly.
Ultimately we look to achieve a balance in fees charged and services provided to ensure that Kiwis end up better off in the long run.
C. Track Record
It is important to National Capital that the fund providers we recommend have an established history of success. We require that any fund provider or their parent company be in the business of investing on clients behalf for at least five years.
We also require that the quantitative data for funds we recommend are available for at least the last five years. In some cases, if the providers' KiwiSaver fund is less than five years old, we look for relevant data which could come from a non-KiwiSaver version of that fund, or in the case of passive funds, the benchmark used.
Our advice is based on what type of fund is appropriate for a client for their current financial position and volatility appetite. The determination of the type of fund is based on the asset allocation of the funds, so it’s very important to ensure that we do not just go by fund names, but actually confirm the asset allocation of funds. KiwiSaver funds have names which are supposed to reflect the underlying asset allocation of the fund - eg: Growth Fund. However, each provider may have a different interpretation of what a Growth or Balanced fund may be. So what a certain KiwiSaver provider calls a Balanced fund may actually have the asset allocation of a Growth fund.
To ensure that we are comparing apples to apples, we first determine the appropriate asset allocations for different types of funds. We then check to see that the funds grouping in our Investment selection process is consistent with that asset allocation. Currently, we use the MorningStar KiwiSaver Survey data to achieve this.
It is not by accident that Performance is the last pillar of our Investment Selection Policy. Past performance of a fund may not necessarily an indicator of future success. However, history does give us valuable information. If a fund manager has been consistently achieving a high rate of return over a long time-frame we can assume that this is based on robust investment policies, keeping trading costs low, and generally working harder. We would rather invest with such a manager than one which has had consistently sub-standard results.
National Capital screens the coverage of its funds by measuring the performance of each individual fund against its peers, and this is part of our Investment Selection Policy. We want to make sure that your savings are growing, and ensuring that your money is invested in funds that have a great historical performance relative to its peers is a great place to end.
We run through the following process on a quarterly basis.
Step 1 - KiwiSaver Fund Universe
We list all funds from the Morningstar KiwiSaver survey which have the appropriate asset allocation for the type of fund we are looking to select.
We have also chosen not to consider funds in the aggressive category (>85% Growth assets) because so far the returns generated in the last five years are not significantly higher than the growth category to justify the more aggressive asset allocations. We will revisit this category as more data and the list of aggressive funds becomes more robust.
Step 2 - Filtering for in-scope Providers
The funds are then filtered based on the providers we currently work with and cover. We realise that the more providers we add to our coverage list, the better the selection and service we can give our clients. So our endeavour is to keep working to increase the number of providers we work with. The current list of schemes we take into consideration in our Investment Selection process is below.
Step 3 - Exclusions
Next, we apply exclusions to the list as per the criteria noted below. This is done to ensure we are not considering duplicate funds or funds which do not have a fixed asset allocation.
There are some 'duplicate' funds which have the exact same portfolio composition but are distributed by different schemes. We exclude these duplicate funds from consideration, keeping only the fund with the lowest fees in our selection process. The following duplicate funds have been excluded from our investment selection process:
Step 4 - Sorting by Returns
The remaining funds are then sorted by their five-year returns(after fees but before tax). We will limit our scope to only those funds which have above or equal to median returns of all funds in the list.
Past performance of a fund may not necessarily be an indicator of future success. However, history does give us valuable information. This is why we take the longer-term performance history of the fund which currently is five years. We believe this gives us a better indication of whether the manager is achieving a high rate of return due to their investment policies, low trading costs low, and hard work rather than just pure luck.
Step 5 - Sorting by Fees
The funds are then sorted by fees in ascending order. Funds that have lower than median or median fees are considered for recommendation to our clients.
Irrespective of the sequence of steps 4 and 5, the funds that are selected for our final recommendations will both be in the top half of five-year returns and the lowest half of fees.
Using the five steps allows us to consider fees in relation to both past performance of the funds and the services offered by the KiwiSaver providers, rather than just take the extreme view that fees are the only aspect you should consider when choosing providers.
Step 6 - Final Fund Selection & Ranking
From the funds that fulfil all the criteria in the first five steps, by default we then select a single fund to recommend to new clients as follows:
However, if a client has specific provider preferences indicated on the HealthCheck, they will take precedence over the default options.
Exceptions to the above Investment Selection Process
There are two exceptions to our investment selection process
We have clients for whom Environment and Social concerns are the top priority when choosing a KiwiSaver provider. For clients who do not mind paying slightly higher fees and potentially having slightly lower returns in exchange for being with an ESG focussed KiwiSaver provider, we recommend funds from CareSaver.
CareSaver is an investment manager focused on investing in ethical assets, making sure the company is making conscious choices for doing good with the money they manage. This means that their core philosophy revolves around choosing investments that have a high quality of environmental, social, and governance matters when managing their investments. Their Exclusion policy is long, and CareSaver is a manager that rigorously adheres to it. Below are the investment types that CareSaver avoids investing in:
While investment managers typically hold similar lists of exclusions, the details of their policies may allow room to circumvent them and invest in assets that traditionally violate ESG principles. Rated as ‘Mindful’ by Mindful Money, a website dedicated to monitoring the ESG policies and investments of each investment manager. CareSaver currently holds 0% of investments across their funds that could violate their ESG policy.
2. Specific Client Circumstances or Preference
We pride ourselves on providing personalised advice to our clients. In certain cases, we might recommend funds which fall out of the above Investment Selection Process. This would only be in case of a specific client circumstance or preference. In such cases, we will inform the client of the deviation from our standard Investment selection process and explain the reasons why.
The Investment Selection Data spreadsheet as per 12th November 2019 can be found here.
Are we independent?
Since we work with a select group of providers, most of whom we will receive a commission from, we will not be marketing ourselves as 'Independent'. However, we are legislated to follow a code of conduct in which we must put the interests of our clients before our own. We intend doing that anyways, since its just good practice and the right thing to do. Our ethics policy and values can be found below.