My review of Kiwisaver has prompted me to seek out the most cost-efficient group of funds on the market – namely, Simplicity Kiwisaver. While the rates of return on Simplicity funds are lower than the previous bank-based fund I was with, the fees are significantly lower, particularly as the fund grows in size.
Within the Simplicity Kiwisaver group of funds there are four options. They are Conservative, Balanced and Growth and Guaranteed Income. The Guaranteed Income one I can discount straight away because it sacrifices income for an insurance policy that I believe to be unnecessary. The Conservative Fund looks good but with circa 75% of its assets invested in bond funds, it is just a bit too low risk and low return for a long term investor in my position. That leaves the Balanced and Growth funds.
Most people with Simplicity have opted for the Growth Fund. I must say that the Growth Fund has done very well recently, with a recent annual return of 10.24%. This, combined with the lower administration cost of the fund is quite impressive, and should lead to some strong returns over time. But strong short terms returns are not what I am looking for.
A closer inspection of the Simplicity Growth Fund shows that most of its investments are in equities with virtually nothing in fixed interest and a tiny position in cash. The problem with this is, when there is a correction to the economic cycle, the value of these equity funds will likely decline significantly. And while I don’t want to speculate on exactly when a crash will happen, I don’t think that one is necessarily too far away.
The Balanced Fund, by comparison, has a much stronger position in ‘fixed interest’ or bond funds. Roughly 40% of the fund is in fixed interest investments, which is a far healthier number. While the investment return for the fund in the recent year is far lower than the Growth Fund, being 7.52% compared with 10.24%, I believe that this fund will be much more resilient in the event of a financial correction, as it will continue to pay the payments from the fixed income, and the capital value of the fund will be far less likely to implode. Which means that the additional $2 weekly instalments that I’m putting into my Kiwisaver on top of what my employer puts in and my own compulsory contribution will hold their value for longer.
This style of investment also falls in line with the recommendations of one of my investment superheros, Benjamin Graham. In his book The Intelligent Investor, Graham recommended that at any stage of an investor’s life, they should hold a position of 40-60% of their investments in bonds. The reason being that the fixed interest component will continue to pay an income stream regardless of the performance of the stock market.
So it is a good long term strategy, according to one of last century’s best advisers. But there is another reason why I’m following this approach. With everything going the way it’s going, I’m just a touch cynical about the future of the NZ economy – enough to prefer a higher level of safety to a high rate of return. While I can’t see any economic indicators that spell short term apocalypse, something just feels a little bit stretched for my comfort.
So I’ve chosen a ‘middle way’ approach, sacrificing higher recent historical rates of return for greater security, but still operating within the lower cost Simplicity Kiwisaver framework.
