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

1. What’s on offer

Simplicity is a non-profit fund manager who offers six (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 four diversified funds, all investing in a mix of domestic and international shares and bonds:

  • Growth Fund – Invests primarily in NZ, Australia, 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.

Their fourth 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 0.31% p.a. except for the Default Fund which has a fee of 0.30%. There are no account or membership fees on these funds.


Single sector funds

Simplicity also offers two 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.

Both single sector funds have a management fee of 0.10% 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:

FundGrowthBalanced/
Default
Conservative
Cash2%2%2%
NZ bonds7.5%16.5%33%
International bonds10.5%22.5%42%
NZ shares18%13.5%6%
Australian shares6%4.5%1.5%
International shares53%39%15.5%
Unlisted NZ property3%2%

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. We cover NZ shares index funds in more detail in the below article.

Further Reading:
What’s the best NZ shares index fund in 2022?


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:

  • 2% of the Growth Fund
  • 5.5% of the Balanced Fund
  • 7.5% of the Conservative 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:

  • 3% of the Growth Fund
  • 2% of the Balanced 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).

Simplicity Living has 2 apartment developments under construction and another 3 in the pipeline.

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 2.5% of the Growth 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

Simplicity invests in their international shares through Australian domiciled Vanguard index funds, resulting in a tax leakage issue. This works as follows:

When an international company held in a fund pays dividends, that fund has to pay tax on those dividends. This includes a 15% withholding tax that goes to the foreign government of where the dividend paying company is domiciled. For example, when Apple pays a dividend, your fund has to pay withholding tax to the US government.

A tax efficient fund would hold their international shares directly, or through another tax efficient vehicle. This allows the fund to claim that 15% foreign withholding tax as a tax credit to reduce the amount of tax payable to our own NZ government.

However, because Simplicity’s funds invest in international shares through Australian domiciled funds, they can’t claim the tax credits relating to those foreign dividends, effectively meaning Simplicity’s funds pay more tax than necessary. That extra tax then gets passed onto their investors.

The issue affects all Simplicity diversified funds, and is estimated to cost Growth fund investors 0.15% per year. The good news is that Simplicity are working on fixing the issue, likely by moving to another supplier for their international share funds.

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


Currency hedging

Simplicity uses currency hedging on their overseas investments to minimise the impact of exchange rate movements on their value:

  • International bonds – 100% hedged to the NZ dollar
  • Australian and international shares – 65% hedged to the NZ dollar

Further Reading:
Hedged vs Unhedged funds – What’s better?


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 Fund offers higher potential returns but is more volatile (given its higher allocation to shares), so is more suitable for long-term investors (who have time to ride out the volatility). The Conservative Fund has lower potential returns but is less volatile (given its higher allocation to bonds), so is more suitable for shorter-term investors (who need to protect their investment from volatility). The Balanced Fund falls in the middle of these two funds.

Minimum suggested investment timeframe
Growth9 years
Balanced/Default6 years
Conservative3 years

However, Simplicity’s three-sizes-fits-all offering leaves a couple of big gaps in their product range:

  • No Cash fund – Simplicity’s least risky fund is the Conservative Fund which can still experience downturns in its value. There’s no cash fund 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.
  • No Aggressive fund – Simplicity’s riskiest fund is the Growth Fund which contains a ~20% allocation to bonds. While these bonds help to reduce the volatility of this fund, they act as a drag on long-term returns. There’s no Aggressive fund (which invests almost entirely into shares) for long-term investors who are willing to take on more risk for higher potential returns.

Single sector funds

Simplicity’s single sector funds are less useful.They’re 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. 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 a non-Simplicity single sector fund (such as a global share fund from the likes of Smartshares, Kernel, Macquarie, or Vanguard) 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:

ProductRate
Simplicity First Home Loan5.15%
Kiwibank 1 year fixed rate6.39%
Kiwibank floating rate7.75%
Rates are as at 12 Dec 2022 and are subject to change

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

ProductMonthly 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 Conservative Fund, which contains bonds and shares, exposing your house deposit to the volatility of the markets. A $100,000 deposit invested in such a fund a year ago would 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.

Sugar Wallet

Sugar Wallet is an investment platform that offers investment into Simplicity’s Growth, Balanced, or Conservative funds. This may raise the question of whether it’s better to invest in these funds direct via Simplicity or through Sugar Wallet. The key differences between the platforms are:

Direct via SimplicitySugar Wallet
Fees0.31%
No account fees
0.31% +
$36 p.a. account fee
Minimum investment$1,000$1
User interfaceResponsive web appNative mobile app
Depositing moneyVia online bankingApp linked to your bank account

So generally it’s better to invest direct via Simplicity as that’ll save you $36 per year in account fees. The only substantial benefit of investing via Sugar Wallet is their lower minimum investment.

Further Reading:
Sugar Wallet review – Clipping the ticket?

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:

  • Tax efficient – Foundation Series’ diversified funds have no tax leakage issues. While we have limited performance data, we do know that Foundation Series has recently performed better than Simplicity, partially due to this tax efficiency. For example, the Foundation Series Growth Fund is down 10.8% for the year to 30 September 2022, while Simplicity’s Growth Fund is down 13.5%. This has more than made up for the slightly higher fees they charge compared with Simplicity (0.37% vs 0.31%).
  • 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 Conservative option – Unlike Simplicity, Foundation Series has no Conservative fund. Their Balanced and Growth options will likely only suit medium to long term investors.
  • No Cash or Aggressive options – Similar to Simplicity, Foundation Series doesn’t have Cash and Aggressive fund options.
  • 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). These funds aren’t comparable with Simplicity’s funds, as they don’t have an equivalent product. However, the funds could complement each other – For example, you could invest in Simplicity’s NZ Share Fund to get exposure to domestic shares, plus Foundation Series’ Total World Fund to diversify your investments globally.

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


Kernel

Kernel is an index fund manager offering 17 funds in both KiwiSaver and non-KiwiSaver form. They have a number of advantages over Simplicity:

  • Covers gaps in Simplicity’s offering – Kernel offers the High Growth Fund, which is an Aggressive fund investing almost entirely into shares. They also recently launched their Cash Plus Fund. Simplicity doesn’t offer an equivalent to these funds.
  • Often has lower fees – Most of Kernel’s funds have a management fee of 0.25%, beating Simplicity’s 0.31% 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 $100,000 balance the membership fee is equivalent to 0.06%, resulting in a total fee of 0.31%.
  • Kernel’s offering also has gaps – Kernel doesn’t have a Growth or Conservative fund (although they do offer a Balanced fund). However, it can be argued that Kernel’s High Growth and Cash funds are more useful products, making up for these gaps.
  • Less comprehensive ethical options – Most of Kernel’s funds don’t have ethical exclusions.

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 0.31% without any extra account or transaction fees. The 0.10% fee for their single sector funds makes them the lowest fee NZ 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.
  • Tax leakage – At the time of writing Simplicity’s diversified funds suffer from tax leakage issues, however, they’re working to resolve this.

And lastly, here’s a couple of uglier aspects of Simplicity’s offering:

  • No Cash fund – Simplicity markets themselves to first home buyers with their home loan offering – Yet none of their funds suit investors who are close to withdrawing their money for their home, due to the lack of a cash fund.
  • No Aggressive fund – Many long-term investors prefer Aggressive funds investing almost entirely into shares, which Simplicity doesn’t offer.

Overall Simplicity is one of the better investment providers in NZ, whether you invest through them for KiwiSaver or non-KiwiSaver investments. However, they’re very far from perfect. Due to the gaps in their offering plus a few other flaws, we think that many people will find the likes of Kernel and InvestNow Foundation Series superior options these days. But we’re sure that Simplicity will continue to innovate and improve their product offering, and retain their status as one of New Zealand’s most popular investment firms.

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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.


Comments

  1. I signed up with Simplicity growth fund as at the time they were the only passive index KiwiSaver fund manager and had the lowest fees. I think Kernel’s growth fund is worth serious consideration as their fees are lower and they are truly a growth fund with 98% in equities where as Simplicity has close to 20% in defensive assets. The tax leakage is a concern but I like that Simplicity gets its world exposure through Vanguard and has greater exposure to the ASX where as Kernel is world top 100 and NZ top 20.

    1. Yes, Kernel’s fund is definitely worth considering if you have a high risk tolerance and don’t want those defensive assets holding your potential returns back. They do make up for the lack of ASX with more NZ exposure, which is arguably more tax efficient anyway.

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