Aggressive funds have returned 10.89 percent a year over five years, and 9.34 percent over 10 years. Photo: RNZ
A "dramatic" shift of KiwiSaver investments into riskier funds should make New Zealanders better off in the long run, if past trends hold true.
The Financial Markets Authority (FMA) released research this week noting the significant shift in risk of KiwiSaver investments.
The proportion of KiwiSaver in funds that are risk category five, with high volatility, has quadrupled from 10 percent in 2021 to more than 40 percent in 2024.
Riskier funds can be expected to be more volatile but over the long term should produce better results. They are generally recommended for investors who still have a significant period of time until they need to access their investments.
Morningstar data shows that aggressive funds have returned 10.89 percent a year over five years, and 9.34 percent over 10 years.
That is compared to 3.07 percent a year over 10 years for conservative funds, 4.47 percent for moderate funds, 6.18 percent for balanced and 7.68 percent for growth.
Data director Greg Bunkall said cash investments' returns had lagged the rate of inflation over that time.
The FMA said the proportion of KiwiSaver investments in lower risk funds dropped from 30 percent to 10 percent over the same 2021-to-2025 period.
Part of this was due to the change to default funds, which now require them to be balanced. But it said there were other factors at play, too.
"In the period prior to the Covid-19 global pandemic, interest rates were historically low, and inflation was low and stable. As a result, many fixed-income assets provided low returns. On the other hand, stock markets have performed very well in most years since 2017, and the few periods of weakness quickly reversed.
"The strong performance and relative stability of stock markets may have therefore made higher-risk investments more attractive to investors. The persistence of this situation over several years may have contributed to the observed shift in preference for higher-risk investments, illustrating adaptive expectations among investors."
It said market performance could also have affected the risk rating of funds. Spikes of volatility in 2020 and earlier this year affect funds' performance history.
A number of providers have recently launched "high growth" funds that invest almost solely in equities.
FMA director of markets, investors and reporting John Horner said the FMA was not necessarily implying that people were in the wrong fund or that providers were advising members towards higher-risk funds.
"The observed increase in the risk categorisation of KiwiSaver funds appears to reflect a combination of factors including policy settings, investor behaviour, and market volatility.
"KiwiSaver is a long-term savings regime for retirement, and for most long term investments a higher risk strategy will be appropriate.
"We note that as KiwiSaver has been in existence for a while and become more mature there are more options available, including higher risk options, and there is also more material available to allow investors to educate or inform themselves about risk vs reward."
Fisher Funds general manager of KiwiSaver David Boyle said the increase in investments in riskier funds was a good thing for investors wanting to grow retirement savings over the long term.
He said consumers knew more about the role of growth assets in a long-term savings scheme like KiwiSaver. Fund mangers were responding to consumer interest and providing education on the risks and benefits of different fund types.
Investors had experienced the Covid downturn and seen the recovery.
"The advent of platforms that allow investors to build their own portfolios allows providers to launch single sector specialist offerings that are often at the riskier end of the spectrum."
He said members still had choice and there were many lower-risk and savings options available.
Booster chief executive Di Papadopoulos agreed New Zealanders were becoming more sophisticated in assessing their time horizons and figuring out if they could handle more risk to target higher returns.
"It appears people are moving to higher risk funds that align with them not needing their KiwiSaver money for retirement anytime soon," she said.
"At Booster, we have seen the benefit of these decisions. Moving from a balanced fund to a growth fund increases projected balances at retirement significantly.
"A key factor is how soon or long in the future your might need to access your KiwiSaver, such as if you want to use it to buy your first home, or for your retirement.
"If you're unsure about whether you are in the right fund it's a good idea to check in with a financial adviser."
How much difference might your outlook be?
Based on Sorted's retirement calculator…
A 20-year-old joining KiwiSaver now with no investment, earning $60,000 and contributing 4 percent of their salary plus an employer's contribution of 4 percent could expect to have at 65:
$381,354 in a balanced fund
$477,814 in a growth fund
$606,456 in an aggressive fund
This accounts for inflation.
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