who moved the cheese
the impact of fees and returns across different QROPS in NZ
The FMA has done a great job standardising fund reporting, which now means that we can analyse the landscape of QROPS in New Zealand to provide a comparison of fees and returns.
We opened the bonnet on eight QROPS schemes in New Zealand that offer PIE funds (which are the vanilla form of investments in superannuation schemes). They were easy to get information on as they all have consistent fund fact sheets in respect of what must be reported.
The analysis is really pertinent at a time when returns on funds have suffered due to falls in equity markets. Fund fact sheets are quarterly so we took the latest ones, which are 31 December 2018 as our benchmark and looked at the last year of fees and performance.
To save us a bit of time, and in the name of relevance, we concentrated on conservative, balanced and growth portfolios. This is where the majority of the money ends up in QROPS schemes.
Risk indicator doesn’t mean return indicator
First up we grouped all the investments in the different schemes by their risk indicators. The risk indicator is a system developed by the FMA to tell you how risky the investment that you are getting into is. Most of the investments had an indicator of 3 or 4. Three means low to medium volatility and four means medium to high.
In each risk indicator category there was a big spread on the investment returns (after tax and fees) with an over 5% spread on returns on risk category 3. So how can low to medium investments have such large differences in returns? We guess because the risk categories actually traverse a wide range of risk.
So how the hell do you make sure that if you have come out low risk appetite for example, that you actually get an investment that works for you. Get a qualified investment professional to help is our simple answer, because not all funds have the same characteristics just because they have the same risk indicator number.
And remembering that big differences in returns can make big differences in your retirement, choosing the right investments that actually fit your risk profile is really important.
Figure 1: Return and fee profiles for risk indicator 3 and 4 investment funds
Source: New Zealand superannuation schemes fund updates as at 31 December 2018
Across all the schemes you can see a wide spread of after tax and fees returns, with no direct correlation between the fees that are paid on the funds and the results. Indeed some of the lowest fee funds had the most deeply negative performance (such as Scheme 2 in the analysis below).
Names don’t mean much – check the ingredients
Grouping the investments by the names that the funds have been given within the scheme provides some serious insight. The average returns for all the funds with conservative type names (like ‘conservative’ or ‘moderate’) was -1.34% after fees and taxes. But that was hugely skewed by a couple of the funds that returned -3.5% and -5.0% returns in the year.
Now how can there be such big differences between what are meant to be similar things. Well just like when you are shopping in a supermarket looking for pasta there are many different brands and types. So if you’re looking for spaghetti there is a big difference between spaghetti in a can, fresh spaghetti and dried spaghetti. What’s more at different times these different types of spaghetti may cost more or less. Depending on how you feel and what your budget is might determine which spaghetti you choose. They are all called spaghetti but it means different things at different times.
So just like your spaghetti you want to make sure that the funds you are invested in suit you at that time and that you are benchmarking them every year to ensure that they are giving you the best results.
Figure 2:Return and fee profiles by ‘descriptor’ of investment funds
Source: New Zealand superannuation schemes fund updates as at December 2018
This trend was consistent across all investment name types. So even if you describe yourself as balanced, you need to know what is actually in your balanced portfolio, because the proof is in the labelling.
So what’s the moral of the statistics, know your funds by getting a run down of the ingredients in them, if you are allergic to durum wheat get quinoa spaghetti, similarly if you don’t like some of the investments in your fund swap funds. And then make sure that you don’t develop any allergies to those ingredients in the future.
The best way to keep on top of your financial plan is speaking to a qualified adviser, as this may just save you from a heart attack in the future. If you want to know who the various schemes are please enter your details below and we will contact you.
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