Simplicity review – Could there be better fund options out there?

Simplicity is an incredibly popular non-profit fund manager offering a small selection of KiwiSaver and non-KiwiSaver funds. They’re the pioneers of true low-cost, passive investing in New Zealand particularly in the KiwiSaver space, launching in 2016 and growing to have over $4.4 billion invested across 130,000 investors. But since then, many new investment providers have emerged, offering funds with similar or even lower fees. So could there now be better options for kiwi investors? In this article we take a comprehensive look at Simplicity’s funds, what they invest in, their fees, special features (including their home loans) to help you decide whether they’re right for you.

This article covers:
1. What’s on offer
2. What do their funds invest in?
3. Other considerations
4. Simplicity vs competing services

Update (1 May 2023) – Article updated to reflect Simplicity’s latest fund offerings.

1. What’s on offer

Simplicity is a non-profit fund manager who offers eleven (mostly passively managed) funds. The minimum initial investment with Simplicity is:

• Non-KiwiSaver funds – $1,000
• KiwiSaver funds – No minimum investment

Diversified funds

Simplicity offers the following diversified funds, all investing in a mix of domestic and international shares and bonds:

• High Growth Fund – Invests primarily in NZ and international shares.
• Growth Fund – Invests primarily in NZ and international shares, with a small allocation towards bonds.
• Balanced Fund – Invests in a balanced mix between NZ and international shares and bonds.
• Conservative Fund – Invests primarily in NZ and international bonds, with a small allocation towards shares.
• Defensive Fund – Invests primarily in NZ and international bonds

Their sixth diversified fund is identical to the Balanced Fund, but is a default KiwiSaver fund. In other words, people signing up to KiwiSaver without choosing a provider, may be randomly assigned to this fund. It is only available as part of Simplicity’s KiwiSaver scheme.

• Default Fund – Invests in an asset mix identical to the Balanced Fund.

All of Simplicity’s diversified funds have a management fee of 0.29% p.a. There are no account or membership fees on these funds.

Single sector funds

Simplicity also offers five single sector funds, each investing into a single asset class. They’re only available as non-KiwiSaver funds:

• NZ Bond Fund – Invests mainly in NZ government bonds.
• NZ Share Fund – Invests in the largest companies listed on the NZ sharemarket.
• Hedged Global Share Fund – Invests into global shares, hedged to the NZ dollar.
• Unhedged Global Share Fund – Invests into global shares, without currency hedging.
• Hedged Global Bond Fund – Invests into global bonds.

The New Zealand single sector funds have a management fee of 0.10% p.a., while the global single sector funds have a management fee of 0.15% p.a. There are no account or membership fees on these funds.

2. What do their funds invest in?

Asset allocation

Let’s take a more detailed look at what Simplicity’s funds invest in. Firstly here’s the target asset allocations for their diversified funds:

Fund	High Growth	Growth	Balanced/ Default	Conservative	Defensive
Cash	2%	2%	2%	2%	15%
NZ bonds	0%	7.5%	16.5%	33%	44%
International bonds	0%	10.5%	22.5%	42%	36%
NZ shares	15%	16.5%	12%	3.5%	0%
International shares	73%	59%	43.5%	17%	0%
Unlisted NZ property	10%	4.5%	3.5%	2.5%	5%

The majority of assets in these funds are invested in passively managed index funds. However, a small percentage of their assets are invested outside index funds which we cover in the special investments section below.

The asset allocations for their single sector funds are relatively simple:

• NZ Bond Fund – Invests in a portfolio of over 30 bond issues, mostly made up of NZ government bonds.
• NZ Share Fund – Not an S&P/NZX 50 index fund like many other NZ index funds. Instead it tracks the Morningstar NZ Index which includes around 40 of the largest companies listed on the NZX.
• Hedged Global Share Fund – Tracks the Bloomberg DM ex NZ ESG Screened Index, which includes over 1,400 companies across 20+ developed markets.
• Unhedged Global Share Fund – Same as above, but isn’t hedged to the NZ dollar.
• Hedged Global Bond Fund – Tracks the Bloomberg MSCI Global Aggregate SRI Exclusions Float Adjusted Index, which includes bonds from over 2,500 issuers across 20+ countries.

Further Reading:
– What’s the best NZ shares index fund in 2022?
– What’s the best global shares index fund in 2022?
– Hedged vs Unhedged funds – What’s better?

Special investments

Simplicity’s diversified funds are not pure index funds. This is because they contain a number of special investments which include mortgage lending, build-to-rent housing, and private equity. The rationale behind these investments is that KiwiSaver money tends to be invested for several years/decades, so can afford to be invested in less liquid assets in an attempt to enhance performance relative to traditional index funds.

We’ve seen a lot of mixed feelings towards these investments. Some love the ideas behind them and are fans of the benefits they can potentially provide to both society and investors. Others see them as dabbling in side projects, with their products straying away from being simple, passively managed index funds. Let’s look at each investment in more detail:

Mortgage lending

Mortgage lending (categorised under NZ bonds in the above asset allocation table) makes up to:

• 0% of the High Growth Fund
• 3% of the Growth Fund
• 6.5% of the Balanced Fund
• 7.5% of the Conservative Fund
• 15% of the Defensive Fund

This is where investors’ money is lent out as a home loan to first home buyers. The idea behind this investment is that investors will earn a higher amount of interest compared with a term deposit, and borrowers will pay a lower interest rate on their loan than if they were to get a mortgage from a bank. Simplicity have provided loans on over 200 properties so far. More on Simplicity’s home loans and how they compare with traditional home loans in section 3 of this article.

Build-to-rent housing

Build-to-rent housing (categorised under unlisted NZ property in the above asset allocation table) makes up around:

• 10% of the High Growth Fund
• 4.5% of the Growth Fund
• 3.5% of the Balanced Fund
• 2.5% of the Conservative Fund
• 5% of the Defensive Fund

This represents an investment into Simplicity Living, a company which is developing new homes and renting them out to long-term tenants. The idea behind this investment is that it increases housing supply and provides quality, long-term rentals. Investors benefit from rental income, capital gains (the increase in a property’s value over time), and development gains (the difference between the value of a property on completion, and the costs of developing that property).

This investment isn’t without controversy. Some think this represents Simplicity straying away from being a funds management business into a property development firm. It also increases their funds’ exposure to the NZ residential property market – not necessarily desirable especially if you already have substantial exposure to that market through your own home.

This is another reason why I’m personally moving away from the Simplicity Growth Fund.

I don’t want any more exposure to this crazy NZ property market and I’m after a passive fund – not one that is dabbling in mortgages and direct ownership in property.

Reddit comment

Private equity

Private equity (categorised under NZ shares in the above asset allocation table) makes up to:

• 7.5% of the High Growth Fund
• 2.5% of the Growth Fund
• 0% of the Balanced Fund
• 0% of the Conservative Fund
• 0% of the Defensive Fund

This represents an investment into earlier stage, unlisted NZ companies, either directly or through venture capital firm Icehouse Ventures. The rationale behind these investments is that they have higher growth potential compared with companies listed on the NZX (though are higher risk).

Tax leakage

Update (28 Apr 2023) – Simplicity have moved away from Vanguard to DWS, fixing the tax leakage issues.

Simplicity used to invest in their international shares and bonds through Australian domiciled Vanguard index funds, resulting in a tax leakage issue. This occurred because the foreign tax credits associated with these Vanguard funds weren’t able to be claimed by NZ investors, essentially meaning Simplicity investors were paying more tax than necessary. However, as of May 2023 Simplicity have moved the management of their international shares and bonds to DWS, a not very well known, but large global funds manager. Their international assets are now held in a tax efficient PIE structure.

Ethical considerations

Simplicity markets themselves as an ethical fund manager. They make their funds ethical by excluding investments in companies involved in contentious activities like alcohol, tobacco, adult entertainment, and weapons. A good example of this is how they exclude SkyCity from their funds, due to the company’s involvement in gambling and casinos.

However, the following limitations of ethical investing may be worth noting:

• Everyone has different ethical views – Some people may feel that Simplicity’s ethical exclusions don’t go far enough. For example, their funds invest in Nestle, which some people may be horrified to find in their fund due to the company’s human rights abuses. Others may find that their exclusions go too far. For example, many consider alcohol related companies to be an acceptable investment.
• They can’t control what their suppliers invest in – Simplicity relies on a few third party suppliers to manage some of their investments. This can lead to opposing ethical views between the supplier and Simplicity themselves. For example, Simplicity’s managing director and founder, Sam Stubbs, isn’t a fan of cryptocurrency, yet their funds invest in crypto platform Easy Crypto via an Icehouse Ventures fund.

Further Reading:
– 6 types of ethical investments in New Zealand

Who are these funds best suited for?

Diversified funds

You could consider Simplicity’s diversified funds a one-stop shop for your investing needs, saving you from having to pick lots of different funds or individual stocks. That’s because they invest in thousands of companies and bond issues, across several countries and industries, making them diversified enough to be the sole holding in your investment portfolio.

These funds will suit a wide range of investors, whether you’re investing for the short, medium, or long term. Generally the Growth and High Growth Funds offer higher potential returns but are more volatile (given their higher allocation to shares), so are more suitable for long-term investors (who have time to ride out the volatility). The Conservative and Defensive Funds have lower potential returns but are less volatile (given their higher allocation to bonds), so are more suitable for shorter-term investors (who need to protect their investment from volatility). The Balanced Fund falls in the middle of these funds.

	Minimum suggested investment timeframe
High Growth	10 years
Growth	9 years
Balanced/Default	6 years
Conservative	3 years
Defensive	2 years

However, Simplicity’s offering has a big gap, missing a Cash Fund. Simplicity’s least risky fund is the Defensive Fund is primarily invested into bonds, which can still experience downturns in its value. There’s no fund containing 100% cash for those who can’t afford to see the value of their fund go down – For example, those intending to withdraw their money in the very short-term (in 1-2 years) to buy a house.

Single sector funds

Simplicity’s single sector funds are generally not worth investing in if you already invest in Simplicity’s diversified funds. For example, if you already invested in the Growth Fund, the NZ Share Fund wouldn’t give you more diversification, but rather it would overlap with the NZ shares contained within the Growth Fund.

And unlike Simplicity’s diversified funds, they won’t work well as one-stop shop investments. For example, the NZ Share and NZ Bond funds only invest in NZ assets so are far from being diversified enough to be the sole holding in your portfolio. You’d need to invest in these funds in conjunction with their Global single-sector funds for your portfolio to have adequate geographical diversification.

3. Other considerations

Simplicity Home Loans/Mortgages

A unique feature of Simplicity is that they offer home loans to their KiwiSaver members who are first home buyers. The main advantage of their loans compared with traditional mortgage lenders is the lower interest rate:

Product	Rate
Simplicity First Home Loan	5.15%
Kiwibank 1 year fixed rate	6.39%
Kiwibank floating rate	7.75%

So someone taking out a $600,000 loan over 30 years would have the following repayments each month:

Product	Monthly repayment
Simplicity First Home Loan	$3,276
Kiwibank 1 year fixed rate	$3,749
Kiwibank floating rate	$4,298

And as a bonus you can make unlimited extra repayments on the loan without incurring any penalties or break fees. However, there’s a long list of disadvantages to Simplicity’s loans such as:

• Can’t fix your rate – Home loans with traditional lenders allow you to lock in a fixed interest rate for terms of up to 5 years, which can provide certainty around your required repayments. Simplicity’s loans are 100% floating, so borrowers are constantly exposed to interest rate risk.
• Requires a high deposit – Simplicity’s loans require a deposit of 20%. Most first home buyers don’t have such a deposit. Meanwhile other lenders have products that can work with borrowers who have a deposit as low as 5%.
• Requires a high income – Simplicity requires your mortgage repayments to be 30% or less of your after-tax income. That means you either have to have a high income or small mortgage to qualify.
• No revolving credit or offset products – Most traditional lenders offer revolving credit accounts, which allow you to redraw money from your home’s equity (e.g. for an emergency or renovations). Some banks also offer offset mortgages, which allows you to use money in a linked transaction or savings account to offset your home loan balance. Simplicity’s loan can’t be redrawn from or offset against.
• Doesn’t offer cash backs – Many banks offer cash backs when you take out a new loan with them, which is useful for covering legal fees, registered valuation costs (which is required for all Simplicity loans), and any other expenses associated with purchasing a home. With Simplicity, you’re left to pay these expenses out of your own pocket.

Another issue is that you have to be a member of Simplicity’s KiwiSaver scheme to qualify for the loan. But a problem is that their scheme is unsuitable for many first home buyers in the first place due to the lack of a Cash fund. Their least risky fund is the Defensive Fund which contains bonds, exposing your house deposit to the volatility of the markets. A $100,000 deposit invested in such a fund a year ago could now be worth around $90,000! Someone looking to buy their home in the very short-term would ideally place their KiwiSaver into a Cash fund to protect their capital.

Overall Simplicity’s home loan offering has significant limitations and will only suit a very narrow slice of first home buyers. So we don’t think it’s enough reason to sign up to Simplicity, unless you’re certain that you’ll meet the criteria and that it’s the right lending product for you. Other content creators have also given the offering a fair share of criticism which we’ll share in the links below:

I see this as just a clever marketing gimmick.

Your Money Blueprint

Further Reading:
– Simplicity enters the home loan market, but at what cost? (Your Money Blueprint)
– Simplicity may not be the boon first-home buyers expect, broker warns (Stuff.co.nz)

Account types

Simplicity offers individual, joint, and kids accounts. Company and trust accounts are also available, but require a minimum investment of $50,000. Note that KiwiSaver is only available as an individual account.

Tax

All of Simplicity’s funds are Multi-Rate PIEs so are taxed at your Prescribed Investor Rate. They calculate your tax obligations for you, which is payable after the end of every tax year (31 March) or whenever you sell units of a fund. Any tax liability will be settled automatically by selling off enough of your fund’s units to pay off your taxes.

Distributions

None of Simplicity’s funds pay distributions. Any dividends and interest payments their funds earn is automatically reinvested back into the fund’s assets.

Donations

Simplicity donates 15% of their management fees to charity, which has totalled over $5 million to date. A lot of people like this feature as it’s an easy, passive way to support these organisations, but some would prefer to have this money passed back to the investor in the form of lower fees.

4. Simplicity vs competing services

Here’s a brief overview of how Simplicity stacks up to competing services, with links to more detailed reviews on each platform:

Foundation Series

InvestNow Foundation Series offers Growth and Balanced fund options, with similar asset allocations to the equivalent Simplicity funds. Fees are 0.37% for both funds, and they’re available as KiwiSaver and non-KiwiSaver funds. The advantages of Foundation Series over Simplicity are:

• No side projects – Foundation Series’ funds don’t dabble in mortgage lending or build to rent housing. They simply invest in index funds for their share investments, and actively managed funds for their bond investments.
• Lower minimum investment – The Foundation Series funds are available through the InvestNow platform where the minimum investment starts from just $50.

And here’s the disadvantages of the Foundation Series funds:

• No Defensive, Conservative, and Aggressive options – Unlike Simplicity, Foundation Series has no Defensive, Conservative, and Aggressive funds.
• No ethical options – Their funds don’t have any ethical exclusions, which may be a concern for those looking to avoid investing in certain contentious industries.

Foundation Series also has two single sector funds – the US 500 Fund (investing in the S&P 500) and Total World Fund (investing in global shares). The Total World Fund in particular is comparable to Simplicity’s Global Share Funds. Here’s a few key differences between the two:

• Underlying investments – The Total World Fund contains over 9,000 companies from over 40 developed and emerging markets. Simplicity’s global fund has over 1,000 companies from around 25 developed markets only.
• Currency hedging – The Total World Fund is only available in unhedged form. Simplicity’s global fund has both hedged and unhedged versions available.
• Ethical exclusions – Only Simplicity’s Global fund has ethical exclusions.
• Fees – The Total World Fund has a lower ongoing management fee (0.07% vs 0.15%), but has a 0.50% transaction fee to buy/sell the fund. That means you’ll have to hold the Total World Fund for several decades for the lower management fee to offset the transaction fee.
• KiwiSaver – The Total World Fund is available as both a KiwiSaver and non-KiwiSaver fund. Simplicity’s fund is only available outside of KiwiSaver.

Further Reading:
– InvestNow Foundation Series vs Simplicity funds – Tax leakage an issue?

Kernel

Kernel is an index fund manager offering 19 funds in both KiwiSaver and non-KiwiSaver form. They have a number of advantages over Simplicity:

• Has a Cash option – Kernel offers the Cash Plus Fund, which Simplicity doesn’t have an equivalent of.
• Often has lower fees – Most of Kernel’s funds have a management fee of 0.25%, beating Simplicity’s 0.29% fee.
• Wider range of funds – Kernel offers a larger range of 17 funds. This includes a number of single sector funds such as NZ share funds, overseas share funds, and thematic funds – all of which you can pick from in order to build a highly customised investment portfolio. That’s much more flexible than Simplicity’s three-sizes-fits-all offering.
• Focusses on efficiency – Kernel doesn’t have any involvement in side businesses like home loans and housing development. They focus on offering quality index funds, and have built their funds with things like tax efficiency in mind.
• Lower minimum investment – Kernel’s minimum investment is just $1 per fund.

But there’s a couple of downsides compared with Simplicity:

• Membership fees – Kernel charges a $5 per month membership fee if you invest $25,000 or more in their non-KiwiSaver funds. This makes their non-KiwiSaver funds more expensive than Simplicity for balances between $25,000 and $100,000. For example, on a $25,000 balance the membership fee is equivalent to 0.24%, resulting in a total fee of 0.49%. On a $150,000 balance the membership fee is equivalent to 0.04%, resulting in a total fee of 0.29%.
• Kernel’s offering also has gaps – Kernel doesn’t have a Growth, Conservative, or Defensive funds (although they do offer a Balanced fund).

Further Reading:
– Kernel review – High quality index funds

Other competing services

InvestNow

Simplicity and InvestNow are totally different types of investment platform/KiwiSaver scheme. Simplicity is fund manager, meaning the only investments they offer are their own funds. InvestNow is a fund platform, offering various funds from lots of different fund managers. There’s no definitive best out of the two. While Simplicity has a simple selection of funds, InvestNow’s vast options provide more flexibility for building a portfolio – Though this requires more effort in figuring out which funds to invest in.

Further Reading:
– Building an investment portfolio – Simplicity vs InvestNow
– InvestNow review – The most efficient way to invest?

SuperLife/Smartshares

SuperLife is another decent KiwiSaver + non-KiwiSaver offering. They have a more comprehensive suite of diversified funds ranging from Aggressive/High Growth to Cash. The downside is that their funds tend to be more expensive (mostly in the region of 0.50%-0.60%). SuperLife also offer funds that mirror Smartshares’ ETFs – These are single sector funds including those that invest in NZ shares, US shares, global shares, and so on.

Further Reading:
– Smartshares & SuperLife review – The smart way to invest in shares?

kōura

kōura is an interesting KiwiSaver provider which uses a digital advice tool to build a bespoke KiwiSaver portfolio for you. The advantage of this is that your KiwiSaver will be personalised and aligned with your needs, without having to guess what asset allocation is right for you, and without the limitations of Simplicity’s three-sizes-fits-all model. The downside is that kōura is relatively expensive, with fees starting from 0.63% plus a $30 per year account fee.

Further Reading:
– Kōura review – Crypto meets KiwiSaver

Active fund managers

Milford, Fisher Funds, and Juno are examples of active fund managers, while Simplicity is mostly a passive fund manager. Actively managed funds employ portfolio managers to research and pick assets to invest in with the aim to beat the market, whereas passively managed funds simply try to match the return of the market. However, their downside is that actively managed funds charge higher fees, and most of them fail to consistently beat the market over the long-term. There’s no definitive best out of passive vs active, but rather it’s a question of personal preference.

Further Reading:
– Milford review – Better than index funds?
– The ultimate guide to KiwiSaver funds and schemes

Other platforms

Sharesies, Hatch, and Stake are popular investment platforms, but they aren’t direct competitors to Simplicity, being brokers that offer access to buy and sell individual shares and ETFs listed on the sharemarket. They’re better suited to those wanting to research and select companies or ETFs themselves (essentially allowing you to be your own fund manager), while Simplicity targets hands-off investors.

Further Reading:
– Sharesies review – Still a good investment platform in late 2021?
– Hatch review – Hard to recommend

Conclusion

In summary, the best features of Simplicity are:

• Simple, diversified investment options – Their diversified funds are a one-stop shop for building an investment portfolio. By investing in them you can be confident your money is well spread out across thousands of investments across multiple asset classes, industry sectors, and geographies.
• Low fees – The management fee for their diversified funds is just 0.29% without any extra account or transaction fees. The 0.10%-0.15% fee for their single sector funds makes them among the lowest fee NZ and global share and bond funds.
• Non-financial factors – Many investors like Simplicity’s ethical exclusions, non-profit structure, and how they donate 15% of management fees to charity.

And these features aren’t necessarily bad, but can be slightly more controversial:

• Alternative investments – Some people like how Simplicity’s investments into build-to-rent housing and mortgage lending have a good impact on society, but others see them as passion projects which distract them from their core business as a fund manager.
• Home loans – This could be a way for first home buyers to save money on their mortgage, but only those very well off will be able to meet Simplicity’s lending criteria. The product itself is incredibly limited compared with traditional loan options. We would lean towards this being more of a marketing gimmick.
• High minimum investment – The minimum investment into their non-KiwiSaver funds is $1,000, which isn’t unreasonable, but still significantly higher than competing services.

And lastly, here’s an uglier aspect of Simplicity’s offering:

• No Cash fund – Simplicity markets themselves to first home buyers with their home loan offering – Yet none of their funds genuinely suit investors who are close to withdrawing their money for their home, due to the lack of a cash fund.

Overall Simplicity is one of the better investment providers in NZ, whether you invest through them for KiwiSaver or non-KiwiSaver investments. However, they are somewhat divisive, especially with their non-index investments. While Simplicity deserve their status as one of New Zealand’s most popular investment firms, they face strong competition from the likes of Kernel and InvestNow Foundation Series.

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Disclaimer

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.