Following on from my decision to invest an additional $2 per week into Kiwisaver, I went through a process of assessing my long term goals, reviewing the available funds and their investment philosophies, and arriving at the decision that the best long term investment option that met my investment criteria was the Simplicity Kiwisaver Balanced Fund.
This was all well and good, but I recently had the opportunity to put my newfound ideas to the test. Through a colleague I was referred to an investment specialist who recommended Generate Kiwisaver over Simplicity. While I had 99% made up my mind at this point, I was open to reason; after all, if a fund manager can show me a better way to invest my money to make superior returns over the long run, why wouldn’t I be interested in investing?
With Generate Kiwisaver achieving over 16% return on investment last year, the numbers certainly did sound attractive. Almost too attractive, to be honest, certainly warranting further investigation. So I decided to do a comparison between the funds to see which fund really met my investment goals.
My investment goals regarding Kiwisaver were to meet the following four points:
1) Protect my capital
2) Achieve stable long term returns
3) Invest around 40% of the portfolio into bonds to safeguard against downturns in the market
4) Choose a fund that had evidence of lower fees over the long term.
This is how Generate Kiwisaver stacked up against these four criteria.
Bonds
Simplicity Kiwisaver Balanced Fund invests 40% of the value of the fund in a portfolio of bonds. This achieves my number one goal, which is to protect the capital that I am investing regularly in Kiwisaver.
Since bonds pay out a fixed return, the value of bonds tends to fluctuate less than stocks. This means that the investment medium is better positioned to weather a downturn, in my view.
That, and the fact that one of my investment heroes, Benjamin Graham, recommends a minimum of 40% of your portfolio be held in bonds, means that the Simplicity Kiwisaver Balanced Fund satisfies my criteria better than Generate.
But it is essential to note that only the Simplicity Balanced Kiwisaver Fund invests at a mix of 40% fixed interest – the Growth fund does not.
Low Fees
In the fee structure front Simplicity Kiwisaver emerges as the clear winner. The cost of fees for Simplicity is $30 per annum plus 0.31% of funds under management. While each of Generate’s funds charge different fees, the Focused Growth Fund charges $36 per annum and unapologetically charges 1.69% of the Net Asset Value of your Kiwisaver balance – which could be a significant amount in the late stages of investment, and on the surface looks to be more than 400% higher than Simplicity. But, in fairness, the higher level of fees needs also to be considered in line with the higher promised earnings.
Capital Protection
Since it is not clear to what extent my funds have been invested in the various investments listed on the Generate Kiwisaver website, it follows that it is also not clear to what extent I can expect the value of the fund to drop if there is a market downturn. A 16% return in a single year can be a great result, but if it is followed by a 20% drop in a later period due in part to a high exposure to equities during a downturn, then it adds very little to the overall long term result. As it stands I feel it would be unwise to place my capital in such an investment at the peak of the market.
Transparency
While Generate provides information on which funds it invests with, the specific allocation of your Kiwisaver towards each fund is not clear.
This was a deal-breaker for me, because in order for the investment to meet my criteria, I needed to be sure that 40% of the fund was invested in bonds.
What Generate could do to improve my chances of investment in their fund is provide more specific details about the amount invested in each of their chosen funds at each of the fund levels – this would at least help me to gather the information I need to find out whether the fund meets my criteria.
Length of Operation and Return
Both funds have existed for a fairly short period of time. Generate was established in April 2013, and its most aggressive high performance fund, the Focused Growth Fund, has achieved an average return on 10.9% since inception.
Simplicity Kiwisaver has been going only just over two years. The market index annual return has been 8.43% since inception. This is not as high as Generate, but due to the investment mix, it seems clear to me that the fund will overall produce consistent long term results, which is what I am after.
You would think that a fund with a longer operating history would be more attractive – but because the investments are so diversified, the length of operation makes little difference.
In my view, Simplicity needs to be given more of a chance to show its performance over a longer period of time.
So my conclusion, based on what I have been able to gather from the websites, is that Generate suffers from a lack of transparency which may mask a higher level of risk. Nonetheless, it has achieved some exceptional results in recent years, and has every right to be considered a front runner.
Nothing in this blog constitutes financial advice – this is purely a reflection of my own tests based on my unique circumstances and criteria, and you should certainly seek investment advice before making any decision.
