Foundation Series is InvestNow’s house brand of managed funds which has been offering their competitive (and perhaps underrated) Growth and Balanced funds for a couple of years now. In November 2022 they expanded their offering with their US 500 and Total World index funds, two ultra low-cost options with a respective 0.03% and 0.07% management fee. This review takes a look into Foundation Series’ funds, what they invest in, and how they compare with competing fund options. Is there any catch with their market leading low fees?
Update (1 Mar 2023) – The Foundation Series US 500 and Total World funds are now available through InvestNow’s KiwiSaver scheme
1. What’s on offer
Foundation Series is a range of four (mostly passively managed) funds launched by InvestNow, designed as simple, low cost products to be the “foundation” or core of one’s investment portfolio. The funds are available exclusively on the InvestNow platform.
– InvestNow review – The most efficient way to invest?
Their funds on offer fall into two categories:
Foundation Series offers two diversified funds, investing into a mix of different asset classes. They’re available as non-KiwiSaver funds, as well as part of InvestNow’s KiwiSaver scheme:
- Foundation Series Growth Fund – Invests 80% into NZ and international shares, and 20% into bonds and cash.
- Foundation Series Balanced Fund – Invests 60% into NZ and international shares, and 40% into bonds and cash.
Both funds have a management fee of 0.37% p.a. There’s also a spread that applies when buying or selling units in these funds. This covers the transaction costs of the fund, and work by applying a premium or discount to the fund’s unit price. For example, if a fund’s buy spread is 0.10% you’ll buy units in the fund at a 0.10% premium to the current unit price, and if a fund’s sell spread is 0.11% you’ll sell units in the fund at a 0.11% discount to the current unit price.
|Buy spread||Sell spread|
Otherwise there’s no other account or transaction fees associated with these funds.
Foundation Series also offers two funds that invest only into international shares. They’re available as non-KiwiSaver funds, as well as part of InvestNow’s KiwiSaver scheme:
- Foundation Series US 500 Fund – Tracks the S&P 500 index, investing in the 500 largest companies listed in the United States.
- Foundation Series Total World Fund – Invests in over 9,000 companies from over 40 different countries including the US, UK, Japan, China, Canada, and Australia.
The US 500 Fund has a management fee of 0.03% and Total World has a fee of 0.07%. That’s incredibly low, being the cheapest index funds you’ll find here in New Zealand, and even being on par with their American Vanguard equivalents. It’s likely InvestNow are running these funds at zero or very little profit, to attract more customers to the platform.
However, the funds also have a 0.50% transaction fee to buy or sell, which covers the costs of brokerage, foreign exchange, and general fund running costs. That deviates from all other funds on the InvestNow platform which do not have transaction fees. More on this fee and how it compares with competing funds later in this article.
2. What do their funds invest in?
Here’s a little more detail on what each fund invests in:
Each diversified fund invests across five asset classes, with the Growth Fund having a higher allocation to shares, and the Balanced Fund having a higher allocation to bonds:
The NZ and International shares portion of each fund is passively managed, while the NZ and International bonds are actively managed.
Foundation Series’ share funds work by investing into US-listed Vanguard ETFs as their sole holdings:
- US 500 Fund – Tracks the S&P 500 Index by investing in the Vanguard S&P 500 ETF (VOO).
- Total World Fund – Tracks the FTSE Global All Cap Index by investing in the Vanguard Total World Stock ETF (VT).
Both are diversified across many companies and industries, though the key differences between the US 500 Fund and Total World Fund are:
- US 500 only contains US-listed companies, while Total World invests beyond the US, with investments into companies from Europe, Asia, Australasia, and beyond.
- US 500 only invests into large companies, while Total World also contains mid and small cap companies. That provides a better overall representation of global sharemarkets compared to the S&P 500, but the vast number of companies it contains (over 9,000) is arguably overkill in terms of diversification.
There’s little reason to invest in both, given US shares are already heavily represented in the Total World Fund, making up approximately 60% of the fund.
– What do NZX 50, S&P 500, and Total World index funds actually invest in?
Who are these funds best suited for?
With their investments into multiple asset classes, the diversified funds are like a one-stop shop for putting together an investment portfolio. Great if you’re looking to invest, but want something incredibly simple and hands-off as we covered in the article below:
– 4 steps to create an incredibly simple long-term investment portfolio
Generally the Growth Fund would suit long-term investors (with it’s high allocation to shares), while the Balanced Fund would better suit medium-term investors or those wanting a slightly less volatile investment (with its higher allocation to bonds).
However, there’s a couple of gaps in Foundation Series’ offering:
- No Conservative or Cash fund – Neither of the diversified funds have a high allocation to bonds/cash, making them unsuitable for shorter-term investors. However, there are other funds available on the InvestNow platform that can fill this gap.
- No Aggressive fund – The Foundation Series Growth Fund contains 80% shares and 20% bonds/cash, but some long-term investors prefer Aggressive funds which contain an even higher allocation towards shares (and therefore higher potential returns). However, their share funds (or the other funds on InvestNow) go some way in addressing this gap.
Foundation Series’ share funds are less diversified, each investing only in a single asset class. But they’re still handy building blocks for an investment portfolio, for example, by using them to complement a NZ shares fund to diversify your portfolio internationally.
The Total World Fund in particular provides an easy way to get exposure to a wide range of geographies in one go, with its investments spanning over 40 countries. Though it’s often argued that the S&P 500 is an adequate substitute for a global fund – just keep in mind it only invests in companies listed in a single country.
3. Other considerations
The minimum lump sum investment into Foundation Series’ funds is $250 per fund. But if you set up a Regular Investment Plan on the InvestNow platform, the minimum investment drops to $50 per fund.
All Foundation Series funds are NZ domiciled and are structured Multi-Rate PIEs so are taxed at your Prescribed Investor Rate. This includes their US 500 and Total World funds which aren’t considered FIFs even though they invest solely into US Vanguard ETFs.
Each fund calculates your tax obligations for you, which is payable either:
- After the end of every tax year (31 March), at which point you’ll be required to deposit the necessary funds into your InvestNow account to settle your tax liability. Or,
- Whenever you sell units of a fund, at which point your tax liability will be automatically deducted from the sale proceeds of your fund.
– Tax on foreign investments – How do FIF and Estate Taxes work?
Foundation Series’ funds are generally tax efficient, with no major tax leakage issues. The exception is their Total World Fund which is slightly tax inefficient, given it invests in non-US shares through a US domiciled ETF. In short, NZ investors can’t claim the tax credits relating to the dividends paid by those non-US shares, resulting in an extra tax impact of about 0.12% p.a.
Foundation Series’ funds do not pay distributions. Instead any interest or dividend income the funds receive are automatically reinvested and reflected as an increase in the value of the funds – So you’re no better or worse off compared with a fund that does pay distributions.
Foundation Series’ Growth and Balanced funds are partially currency hedged:
- The international shares portion of these funds are 50% hedged to the NZ dollar.
- The international bonds portion of these funds are 100% hedged to the NZ dollar.
Both US 500 and Total World funds are unhedged.
4. Foundation Series vs competing funds
S&P 500 funds
The Foundation Series US 500 Fund is almost identical to other S&P 500 options out there, tracking the same index and investing in the exact same companies. Here’s the main competing options, and their management fees:
Foundation Series’ management fee is on par with Vanguard, and cheaper than that of Smartshares’ and Kernel’s funds. But management fees don’t tell the whole story here, as there’s other key factors to consider such as:
- Transaction fees – While Foundation Series and Vanguard funds have low ongoing management fees, they have high one-off costs (transaction and foreign exchange fees). Therefore you’d need to commit to buying and holding these funds for at least 3-4 years for the low management fees to offset the high one-off costs, and be worth it over the Smartshares/Kernel options.
- Tax treatment – All funds are structured as PIEs, except for Vanguard which is a FIF. There’s no definitive best out of the two, though keep in mind that FIFs require a little bit more admin work. A smaller difference is that the Smartshares fund is a listed PIE (taxed at 28% regardless of your PIR), while the Kernel fund is a Multi-Rate PIE (taxed at your PIR).
- Currency hedging – All funds are unhedged, except for Kernel’s S&P 500 Fund which is 100% hedged to the NZ dollar.
- Account fees – Kernel charges a $5 per month account fee if you invest $25,000 or more into their non-KiwiSaver funds. This effectively adds a fee of up to 0.24% p.a. onto their funds.
- KiwiSaver – Smartshares’ (via SuperLife) and Kernel’s funds are available as KiwiSaver funds. Foundation Series’ and Vanguard’s funds are not.
Taking the above factors into consideration, let’s see the results for each fund after 10 years, assuming we have an initial $30,000 to invest and will contribute an extra $500 per month. We’ll also assume that our marginal tax rate is 33%, our PIR is 28%, and that each year we’ll get 7% in capital growth plus 2% in dividends.
|Fund/Platform||Result after 10 years|
|Smartshares USF (purchased via InvestNow)||$150,095|
|Smartshares USF (purchased via Sharesies)||$149,497|
|Foundation Series US 500||$152,287|
|Kernel S&P 500||$150,459|
|Vanguard VOO (purchased via Interactive Brokers)||$153,445|
|Vanguard VOO (purchased via Sharesies)||$152,334|
|Vanguard VOO (purchased via Hatch)||$151,806|
While Foundation Series delivers the best result out of the NZ domiciled funds, the US-listed Vanguard ETF (VOO) comes out on top thanks to some tax advantages it has (by being able to apply the de minimis exemption and CV method when calculating your taxable income). However this result requires you to invest through a foreign platform (Interactive Brokers/IBKR) and deal with the FIF tax rules, which not everyone is keen on.
It’s also important to note that the above results will differ from person to person (depending on things like tax rate and amount you’re investing), given there’s so many variables. You can check out the below article for a more comprehensive comparison between the above S&P 500 index funds, including a link to a spreadsheet to do your own comparison.
– What’s the best S&P 500 index fund in 2022?
The Foundation Series Total World Fund competes with a number of other global share funds including:
- Smartshares Total World ETF (TWF) – 0.40%
- Smartshares Total World (NZ hedged) ETF (TWH) – 0.46%
- Macquarie All Country Global Shares Index Fund – 0.42%
- Russell Sustainable Global Shares Fund – 0.34%
- Russell Hedged Sustainable Global Shares Fund – 0.36%
- Kernel Global 100 Fund – 0.25%
- Kernel Hedged Global 100 Fund – 0.25%
- Vanguard International Shares Select Exclusions Index Fund – 0.20%
- Vanguard International Shares Select Exclusions Index Fund (NZD Hedged) – 0.26%
The set of factors to consider are similar to that of the S&P 500 funds:
- Transaction fees – Foundation Series has a lower ongoing management fee, but higher upfront costs. You’d need to commit to holding the fund 3-4 years to recoup that 0.50% transaction fee. Potentially add on more time if you’re switching from another fund, as you may also need to recoup the spreads/transaction costs associated with selling out of your old fund.
- Tax treatment – All funds are structured as PIEs, except for Vanguard which is a FIF.
- Currency hedging – Smartshares, Russell, Kernel, and Vanguard offer both currency hedged and unhedged versions of their funds, while Macquarie’s fund is 69% hedged to the NZ dollar. Foundation Series’ Total World Fund is only available as an unhedged fund.
- Account fees – Kernel charges a $5 per month account fee if you invest $25,000 or more into their non-KiwiSaver funds.
- KiwiSaver – Smartshares’ (via SuperLife), Macquarie’s (via InvestNow KiwiSaver), and Kernel’s funds are available as KiwiSaver funds.
Plus there’s a few extra important considerations when choosing between these global funds:
- Index tracked – Most of these funds track a different index to each other, therefore have a slightly different set of underlying investments. Unfortunately there’s no way to tell which one will perform the best unless you had a crystal ball.
- Foundation Series: Tracks the FTSE Global All Cap Index, investing in over 9,000 companies from developed and emerging markets.
- Smartshares: Same as the above Foundation Series fund.
- Macquarie: Tracks the MSCI All Country World ex Tobacco Index, investing in almost 3,000 companies from developed and emerging markets.
- Russell: Based on the MSCI ACWI Index, investing in over 1,300 companies from developed and emerging markets.
- Kernel: Tracks the S&P Global 100 Ex-Controversial Weapons Index, investing in 100 of the largest global companies from developed markets.
- Vanguard: Tracks the MSCI World Ex Australia Custom ESG Leaders Index, investing in almost 1,500 companies from developed markets.
- Tax efficiency – These global funds have varying degrees of tax efficiency, with Foundation Series, Smartshares, Macquarie, and Vanguard funds all facing some tax leakage issues.
- Spreads – A few funds also apply spreads when buying into or selling out of the fund:
- Smartshares: ~$0.005
- Macquarie: 0.07%
- Russell: 0.13% – 0.20%
- Vanguard: 0.07% – 0.09%
Taking the above factors into consideration, let’s see the results for each fund after 10 years, assuming we have an initial $30,000 to invest and will contribute an extra $500 per month. We’ll also assume that our marginal tax rate is 33%, our PIR is 28%, and that each year all funds deliver 7% in capital growth plus 2% in dividends (though in reality all funds will deliver a slightly different return due to tracking different indexes).
|Fund||Result after 10 years|
|Smartshares Total World||$148,063|
|Foundation Series Total World||$150,537|
|Macquarie All Country Global Shares||$148,763|
|Russell Sustainable Global Shares||$149,743|
|Kernel Global 100||$150,406|
|Vanguard International Shares||$149,801|
In this case, Foundation Series comes out on top, followed very closely by Kernel, which is quite impressive considering their management fee is much higher than Foundation Series’ fee. Though another option could be to invest directly in Vanguard’s Total World ETF (VT) listed on the US sharemarket, which could deliver even better results than Foundation Series in some instances.
Again it’s important to note that the above results will differ from person to person. You can check out the below article for a more comprehensive comparison between the above global share index funds, including a link to a spreadsheet to do your own comparison.
– What’s the best global shares index fund in 2022?
Foundation Series’ Diversified funds compete with the following providers who also mainly offer passively managed, low cost funds. These are all available as KiwiSaver and non-KiwiSaver funds:
- Simplicity – Offers Growth, Balanced, and Conservative funds, each with management fees of 0.31% p.a.
- Kernel – Offers Aggressive/High Growth, Balanced, and Cash funds, all with management fees of 0.25% p.a.
- BNZ – Offers funds ranging from Growth to Cash, with management fees between 0.30% and 0.45%.
- SuperLife – Offers funds ranging from Aggressive/High Growth to Cash, with management fees between 0.20% and 0.63%.
Once again there’s a lot more to consider than just fees:
- Investment mix – The types of funds on offer differ between providers, for example, only kernel and SuperLife have an Aggressive option, and only Simplicity, BNZ, and SuperLife have a Conservative fund option:
- Alternative investments – Simplicity’s funds invest into a few alternative assets including mortgage lending, build-to-rent housing, and private equity. Some people love these investments as they aim to make a positive impact on society, for example, by providing stable housing. Others don’t like them as they can be seen as gimmicky side projects that detract from what otherwise could be simple, passively managed funds.
- Ethical considerations – Simplicity and BNZ funds exclude investment into a number of industries including tobacco, gambling, adult entertainment, and weapons. Other funds have no (or very limited) ethical exclusions.
- Tax efficiency – Simplicity and SuperLife funds have tax leakage issues, effectively making their funds more expensive that what their management fees initially suggest. The good news is that Simplicity are looking to fix their tax leakage issue in the coming months.
- Account fees – Kernel charges a $5 per month account fee if you invest $25,000 or more into their non-KiwiSaver funds. SuperLife charges a $1 per month account fee for their non-KiwiSaver funds, and $2.50 per month for their KiwiSaver funds.
We’ve always been fans of Foundation Series’ diversified funds, whether it be for KiwiSaver, or non-KiwiSaver investments. They provide a one-stop shop for building a portfolio, and while they don’t have the absolute cheapest fees, they’re still competitive against the likes of Simplicity, especially when you consider the latter currently has tax efficiency issues. However, they’re missing Cash/Conservative and Aggressive funds, so won’t be suitable for everyone.
But probably of higher interest are Foundation Series’ share funds which allow you to get exposure to the S&P 500 or global shares for an ultra low management fee. A lot of Kiwi investors will already have similar funds in their portfolio, and will be considering switching to Foundation Series to take advantage of the market leading 0.03%/0.07% fee.
However, the catch is the 0.50% transaction fee required to buy or sell these funds. You’d need to commit to investing for at least 3-4 years to recoup this transaction fee and make the ultra low management fee worth it over competing funds. That may seem easy, but who knows what’ll happen during that time. Perhaps Foundation Series’ funds will encourage other fund managers to lower their fees and release an even cheaper/better fund – constantly jumping between funds trying to chase the cheapest option probably isn’t a great habit, and could leave you worse off due to all the spreads and transaction fees you’d incur. And even if you do manage to hold one fund for the long-term, the difference in results between the competing fund options isn’t massive.
Overall Foundation Series’ four funds are great products and are well worth considering, especially if you’re implementing a new investment portfolio. But if you have an existing portfolio and are contemplating switching to Foundation Series’ new funds, it’s not a decision we’d rush into (remember you may incur fees from selling out of your old fund as well). Perhaps you may eek out a few hundred dollars in returns over the long-term, but the switch could be more trouble than it’s worth.
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The content of this article is based on Money King NZ’s opinion and should not be considered financial advice. The information should never be used without first assessing your own personal and financial situation, and conducting your own research. You may wish to consult with an authorised financial adviser before making any investment decisions.