What’s been happening in the markets (August 2023) – Is splitting your KiwiSaver a good idea?

In August 2023’s What’s been happening in the markets article we review New Zealand’s newest fund manager, provide some updates on Sharesies and Kernel, and explore National’s proposal to allow splitting KiwiSaver across multiple providers. Is it a good idea?

This article covers:
1. Product updates
2. Keen to split KiwiSaver across multiple providers?
3. Market Movements
4. What we’ve been up to

1. Product updates

Tempo – New Zealand’s newest fund provider

Tempo is the latest fund manager set to launch in New Zealand. Owned by investment advisory and brokerage firm Forsyth Barr (who were previously planning to launch the service under the “Trove” brand), Tempo will initially be offering 15 funds:

  • 5 funds invest in the NZ and Australia markets – These funds invest fully into Octagon’s actively managed funds (Octagon also happens to be owned by Forsyth Barr).
  • 10 funds invest globally – These funds invest entirely into iShares and Vanguard ETFs. Includes a mix of broad market funds, as well as a few sector specific and thematic funds.
Tempo fundUnderlying fundFee
CashOctagon Enhanced Cash1.10%
Local BondOctagon NZ Fixed Interest1.10%
NZ CompaniesOctagon NZ Equities1.20%
AUS CompaniesOctagon Australian Equities1.20%
Australasian PropertyOctagon Listed Property1.20%
Global VarietyiShares MSCI World SRI UCITS1.05%
Global PropertyiShares Global REIT0.99%
Lower CarboniShares MSCI World Paris-Aligned1.05%
Clean EnergyiShares Global Clean Energy1.25%
US ResponsibleiShares ESG Advanced MSCI US0.95%
Diversity and InclusioniShares Inclusion and Diversity1.10%
TechiShares Expanded Tech Sector1.26%
Future CitiesiShares Smart City Infrastructure1.25%
HealthcareVanguard Health Care0.95%
GoldiShares Physical Gold0.97%

What stands out to us here are Tempo’s fees. Their NZ and Australian funds are more expensive than directly investing through their underlying Octagon funds. The Tempo Cash Fund is a standout example, charging 1.10% in management fees while Octagon charges just 0.35%! For more context, most New Zealand cash funds have fees somewhere between 0.20% and 0.40%.

Their global funds are expensive too. Normally you’d expect index funds to be fairly inexpensive in terms of fees, but Tempo is offering them at active management prices. Take Kernel for example who offers a clean energy index fund with a management fee of 0.45%, or a Paris-aligned global index fund at just 0.25%. Tempo offers respective funds at 1.25% and 1.05% p.a., plus their funds likely have tax leakage issues to worry about because they’re investing in overseas shares indirectly through ETFs.

But it’s important to note that fees aren’t the only thing that matters when deciding on a fund to invest in. So when we see high fees like this, we like to think about what extra value the fund manager providing to justify the fees? In Tempo’s case, they provide digital advice on how to construct an investment portfolio that aligns to your needs. Many people have no idea how to put together such a portfolio, so perhaps it’s worth paying the extra to get this guidance as opposed to going the cheap DIY route and getting your portfolio wrong. Overall, it’s up to you to decide whether the extra costs are worth it.


Sharesies adds an automatic dividend reinvestment option

Sharesies has added new functionality to their platform, allowing customers to auto-reinvest their dividends. This works as follows:

  • You’ll still receive dividends as cash. For example, let’s say you’re paid a dividend from Genesis Energy, and this is $2 after tax.
  • If you have dividend auto-invest enabled for that company, the Sharesies platform will automatically use that cash to place a buy order for the company you received the dividend from. For example, the $2 in dividends we got from Genesis will be used to automatically place a buy order in Genesis.
  • Your shares will be bought on market, and you’ll be charged Sharesies’ usual transaction fees for the purchase (1.9% if you’re not on one of their plans).

This functionality is different to a Dividend Reinvestment Plan (DRP), which Sharesies started offering for a limited number of companies back in March. A DRP is a scheme run by a company itself and is only available for selected companies (e.g. Contact Energy). DRPs usually work by issuing you new shares in the company (as opposed to being bough on-market), and this happens brokerage free with the shares sometimes issued at a discount. Sharesies’ dividend auto-reinvest functionality is inferior to DRPs as you have to pay brokerage and don’t get any discounts on your reinvested shares, but it’s still a highly convenient function for those wanting to accumulate more shares in their investments.


Sharesies gives their Save customers a bonus

In August Sharesies celebrated a massive milestone with their “Save” on-call savings product, reaching 30,000 customers who’ve collectively deposited $100 million (that’s $3,333 each). As part of their celebrations Sharesies temporarily increased their variable interest rate from 4.60% to 5.00% for the month of August.

Yet even with the special rate of 5.00%, Sharesies’ on-call savings product still falls short of competing options. Squirrel offers a very similar on-call savings product with a rate of 5.25%, and arguably offers an easier and faster user experience (with the same credit rating too). Kernel, Rabobank, Kiwibank, and Heartland also offer savings accounts with 5.25% or above, though unlike Squirrel’s account, these come with strings attached (like restrictions on withdrawals) so they aren’t an apples to apples comparison. Sharesies’ rate will become even less competitive if they revert back to their normal rate of 4.60%.

Despite the inferior offering, why has Sharesies Save been so successful? Convenience is a big factor. Hundreds of thousands of Kiwis already use Sharesies for other investments, and their interest rate is still really competitive compared with traditional bank offerings. But perhaps the most important factor is their brand, with Sharesies becoming almost synonymous with investing and building wealth. In addition, trust is important in the money world, so people stick to what they know and recognise. You could probably take the worst managed fund in the country, relabel it with the Sharesies brand, and people would still flock to it! We think that in investing it’s certainly worth investigating beyond the brands you know, as the most popular or well known ones won’t necessarily be the best for you.

Further Reading:
Sharesies Save, Kernel Save, Squirrel On-Call – Good places to keep your money?


ANZ launches an aggressive KiwiSaver option

Banks dominate the KiwiSaver market. Most have been in the market since the early days of KiwiSaver, and their familiar brands and trust among consumers has helped them capture the lion’s share of KiwiSaver money. However, they’re often viewed as less innovative as the newer providers (usually just offering boring Growth, Balanced, Conservative, and Cash funds), and at the same time charge high fees without delivering exceptional returns.

ANZ is the world’s largest KiwiSaver provider with around 20% market share and $20 billion in funds under management. They’ve recently become the first bank KiwiSaver scheme to offer a High Growth/Aggressive fund, adding to the growing number of providers with funds that have close to 100% invested in growth assets (i.e. shares, infrastructure, and property). Aggressive funds should provide higher long-term returns than Growth funds (which max out at around 80% in growth assets), but come with greater volatility.

In addition to the new High Growth Fund, ANZ have reduced their fees for their Balanced, Balanced Growth, and Growth funds by 5 basis points. For example, the fee for their Growth Fund has fallen from 1.08% to 1.03%. We still think that ANZ’s KiwiSaver offering isn’t anything special, but they’ll likely remain as largest player in the market for the foreseeable future. So these are all positive changes for investors who choose to stick with the bank.

Further Reading:
ASB, BNZ YouWealth, Kiwi Wealth review – Are managed funds with your bank worth it?


Kernel moves to a daily trading frequency

In June 2023 we reported that Kernel would be moving to daily trading, up from only processing orders 2 times per week on Mondays and Wednesdays. This change came into effect from 21 August, with Kernel now processing buy and sell orders every day from Monday to Friday excluding public holidays. Someone placing an order on Wednesday afternoon will now have that order traded on Thursday, whereas previously they would’ve had to wait until Monday. The 12pm cut-off time for orders to be processed the same day remains.

Given Kernel is mostly designed for investors to build long-term wealth (rather than being a trading platform), the more frequent trading schedule is unlikely to make a huge difference to their customers. However, it does make the platform a little more user friendly and puts Kernel in line with how often most other fund managers trade.


Dasset is the latest crypto exchange to go bust

Dasset was a New Zealand based cryptocurrency exchange, allowing Kiwis to buy, sell, and swap digital assets like Bitcoin and Ethereum. They’ve been signs of trouble at Dasset for months, with several anecdotes of difficulty withdrawing money and getting in contact with support. And unfortunately they’ve now officially joined a growing list of crypto platforms to have failed in recent times, going into liquidation.

Anyone who has crypto stored on Dasset will likely have to go through a long period of uncertainty, while the liquidators do a stocktake of the platform’s assets and work out how much belongs to who. And even after that process, it’s unlikely customers will get all their money back, with initial reports suggesting that $6 million is missing. This includes people who claim to have stored their life savings on the platform!

Seeing people potentially lose money like this is incredibly frustrating to us, as these losses are avoidable or at least can be greatly reduced. We often advocate for the following behaviours in our crypto articles:

  • Store your crypto off exchanges – Preferably in your own wallet which you control the keys to (you can use a non-custodial platform like Easy Crypto to facilitate this). Cryptocurrency platforms are subject to less regulation and scrutiny compared to mainstream investment platforms (like brokers and fund managers), so crypto stored on exchanges is at high risk of being lost if the platform goes under. Dasset isn’t the first, and won’t be the last exchange to go out of business.
  • Diversify your life savings – We view cryptocurrency as a speculative, unstable asset class. It may be ok to invest a little bit into crypto (if you have the right risk tolerance), but if you’re relying on the money as your life savings, it might be worth diversifying into other assets (like shares, bonds, or term deposits)…

Further Reading:
Cryptocurrency 101 – Is it investing or gambling?

2. Keen to split KiwiSaver across multiple providers?

Following National’s proposal to allow KiwiSaver to be used for rental bonds (which we weren’t fans of), the political party has come out with another new policy which would allow investors to split their KiwiSaver money across 2-3 providers (whereas currently you can only invest your KiwiSaver money through one provider). We, along with many of our followers, had mixed feelings about this policy. Our social media polls asking what you thought about the policy had the following results:

What do you think?VotesPercentage
Sounds great!8530%
Bad idea…6623%
I’m not sure13447%

There are definitely benefits to this policy. It gives investors more choice, as they don’t have to go all in on with a single provider (which is something investors can already do with their non-KiwiSaver investments). Here’s a few examples of how we think investors could take advantage of this flexibility:

  • Struggling to decide between two providers? With this policy you could just invest in both! For example, you could invest in Simplicity AND Milford.
  • Want more flexibility in portfolio construction? You could pick different components of your KiwiSaver portfolio from different providers. For example, picking a bond fund from Milford, a NZ equities fund from Kernel, and an international equities fund from SuperLife.
  • Want to diversify your portfolio with satellite investments? Perhaps you want to access a particular specialist fund without leaving your current provider. For example, you could have the ANZ Growth Fund as your main KiwiSaver fund, plus diversify a small portion of your portfolio into something like the Kernel Electric Vehicle Innovation Fund.

National also suggests that the policy could enhance competition, lower fees, and encourage new and innovative products. We certainly see the potential for providers to offer more sector specific and specialised funds, to capture investors seeking to spice up their portfolios.

No, you won’t necessarily double up on fees by splitting your KiwiSaver
Most KiwiSaver fees are percentage based so you won’t necessarily pay more by investing through multiple providers. For example, lets’ say you have a $100,000 KiwiSaver portfolio:
– Investing that with 1 provider charging 1% would result in fees of $1,000 p.a.
– Investing $50,000 with 1 provider, and $50,000 with a 2nd provider charging a weighted average fee of 1% would also result in annual fees of $1,000.

In other words, a 1% fee on a $100,000 portfolio is always going to equate to $1,000 regardless of how many providers you spread that money across.

You’d only be doubling up on fees if both your providers charged a fixed monthly fee (e.g. SuperLife who charge a $2.50 membership fee every month).

However, there’s a few things about this policy we’re cautious about:

  • More complexity – Many people already struggle to choose which fund and provider to go with, and with how to construct an investment portfolio. Adding the option of being able to invest with a 2nd or 3rd provider certainly won’t help with this…
  • Investment tracking – It could be more difficult to track progress towards your goals and get reporting on your KiwiSaver investments if your assets are split across multiple providers.
  • Higher overheads – The proposal would likely increase the number of KiwiSaver customers at each provider, but decrease the average balance per customer. That means fund managers may earn less revenue from each customer to cover the costs of onboarding and supporting that customer. Therefore fees may not reduce as much as expected.

And we’re sceptical about how much benefit splitting providers would actually provide:

  • Limited diversification benefit – Most KiwiSaver funds are already very well diversified, so arguably there’s no need to add further diversification. For example, a typical Growth fund invests in NZ shares, overseas shares, NZ bonds, and overseas bonds. A typical Balanced fund invests in the same asset classes (but with a higher allocation towards bonds). Therefore investing in both a Growth fund and a Balanced fund at another provider won’t necessarily diversify your portfolio into new asset classes.
  • Two isn’t necessarily safer than one – It’s safe enough to have all your KiwiSaver money stored with one provider, because all KiwiSaver funds are held through independent custodians rather than by the fund managers themselves. So if a providers goes bust, your money can still be accessed and transferred to another provider. Splitting your money will provide negligible benefits to the safety of your funds.
  • You can already split your money between providers – KiwiSaver schemes like InvestNow, Sharesies, and AMP already allow you to invest in funds from multiple providers. So what National is proposing is already possible to a limited extent.
  • You won’t necessarily get better returns – Splitting your KiwiSaver across two providers won’t magically enhance your returns. There’s no guarantee the 2nd or 3rd provider you pick will perform better than your first provider.

Overall we don’t think this is a bad policy, but it’s not a policy we need. It’s not going to make a huge difference in the amount people invest and the returns people get, and perhaps this policy will only be utilised by those who’re already engaged with their investments – The same people who arguably have the least need for help with their KiwiSavers. We think there’s better ideas to improve people’s KiwiSaver outcomes. How about retargeting their proposed tax cuts towards only those who contribute to KiwiSaver, by increasing the government contribution?

3. Market Movements

Here’s how the markets performed to 30 August 2023, in both their local currencies and in NZ dollar terms:

Aug 2023 returns
Local currency
Aug 2023 returns
NZD
NZ shares (S&P/NZX 50)-4.44%-4.44%
Australian shares (S&P/ASX 200)-1.52%-1.24%
US shares (S&P 500)-1.61%2.51%
Bitcoin-6.84%-2.93%

Markets were generally weak in August, however, 2023 is still looking positive.

2023 YTD returns
Local currency
2023 YTD returns
NZD
NZ shares (S&P/NZX 50)0.42%0.42%
Australian shares (S&P/ASX 200)3.68%4.86%
US shares (S&P 500)17.59%25.38%
Bitcoin64.75%75.66%

Here’s a number of reasons that might be contributing to this month’s poor performance:

  • Concerns about weakness in China’s economy (NZ’s largest trade partner)
  • Dairy prices falling (one of the country’s largest exports)
  • Fears that interest rates will stay high for longer
  • The market cooling down after performing strongly over the last few months
  • Perhaps some uncertainty over the outcome of the NZ general election

From our perspective we aren’t worried about all these factors, and this was just a normal month in the market. Sometimes the market goes up, and sometimes it goes down. This volatility is a feature of investing in growth assets like shares and property, and It’s the price we pay to get the higher returns of the asset classes. We’re still confident that our investments will put us in a great financial position in the long-term.


NZ market bad?

With the NZ market performing so poorly in recent times, we’re seeing more and more people say that investing domestically is a waste of time and money. But we disagree – Short-term performance isn’t an appropriate metric to use to make judgements on whether a market is good or bad. It’s like trying to pick a marathon winner based on who ran the first two kilometres the fastest. Shares are a long-term investment, and it’s the performance over several years and decades that matters. Historically NZ shares have done relatively well, plus come with tax advantages.

While it’s not guaranteed that NZ shares will perform on par with international shares into the future, there’s no guarantee that US shares will continue their strong run either. Personally we remain confident with having a sizeable portfolio allocation towards our local sharemarket.

4. What we’ve been up to

In case you missed them, here’s the articles we published over the month:

As for updates to our investments, we’ve been holding some crypto in a hardware wallet for a while now, and thought it was a good time to test out the process of recovering our coins in case the wallet got lost or stolen. Losing passwords and seed phrases is a common issue when holding cryptocurrency under self-custody, so ensuring these worked in restoring access to our coins was a worthwhile exercise to mitigate the risk of falling into this trap.

Outside of investing, we have a couple of food highlights for the month:

  • We’re on the hunt for Auckland’s best croissant, and Fort Greene (Karangahape Road) serves up a solid contender.
  • In Mt Albert, Young George makes some scrumptious sourdough toasties.
  • Lastly, we wanted to try something new so went to Gojo Ethiopian Eatery (New Lynn).

Thanks for reading and your ongoing support!

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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.


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