Asset allocation vs fees

07 August 2020

Most people struggle between fees or historical returns when trying to choose a KiwiSaver fund. We want to introduce a third component into the mix, asset allocation - we think this is actually the most important factor of all.

 The two most often talked about reasons people will choose a KiwiSaver fund are:

  •  Fees
  •  Historical Returns

The reasons for this, are pretty basic.  Anything that is paid in fees means lower returns for you - most recent studies have shown that higher fees result in lower returns to investors. And historical returns goes without saying, there is a perception that a manager that has performed well in the past should be able to deliver good returns in the future. Unfortunately, the research shows that is very rarely the case - fund managers that are top quartile in one 5 year period are very rarely top quartile in the following 5 year period.

We would like to introduce a third metric that you should think about in choosing your KiwiSaver fund - asset allocation. Asset allocation at its simplest is the level of growth assets versus income assets that you have in your fund. The higher the level of growth assets, the higher the return, though also the higher volatility a fund will have. 

Most KiwiSaver funds are labelled according to one of three categories:

  • A growth fund will typically have 70-85% growth assets
  • A balanced fund will typically have 35-70% growth assets
  • A conservative fund will typically have 10-35% growth assets

Growth assets have higher volatility and higher returns. And this is shown in the historical returns. Over the past 10 years, the average annual return for a growth fund was 9.8%, the average annual return for a balanced fund was 8.1% and the average annual return for a conservative fund was 6.1%. The difference in these returns is a result of different asset allocations (allocation to growth assets versus income assets).

Looking forward, Blackrock, the largest asset manager in the world expects growth assets to deliver a return of 7.5% per annum and income assets to deliver an income of around 2.7% per annum[1].

To show the impact of asset allocation using these assumptions, we have shown what happens to $10,000 over a period of 30 years under different fee and asset allocation strategies. 

Account Balance for $10,000 after 30 years

Account Balance for 10000 

Hopefully, the example above you can now see why it is extremely important to look at asset allocation as well as fees. This argument is particularly important for passive asset managers who will look to track markets rather than time the market. This argument is slightly less relevant for active managers who will adjust their market positions based on what they expect the markets to do overtime.

This is only relevant for people that can withstand the ups and downs of the markets, typically that means people that do not want to draw down on their KiwiSaver accounts for at least 10 years.  If you are approaching retirement or getting closer to purchasing a house you need to balance returns against minimising volatility.

If you want to see the impact of different asset allocations generate your kōura portfolio and test out a few different kōura portfolios. You will see the impact that asset allocation has on your KiwiSaver forecasts. 


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[1] BlackRock 30 year US Equity and US Fixed Income Returns. Updated as at 30 April.


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