How a KiwiSaver risk indicator meant to help investors evaluate their fund turns out to be no help at all.

It was billionaire investor and famously frugal family man Warren Buffett who said: “Only when the tide goes out do you discover who has been swimming naked”.

Or to put it another way, a rising market covers a multitude of sins.

Bad companies, unsound business practices or weak investments are much easier to hide in bullish times; the dodgiest junk bond or subprime mortgage-backed security can truck upwards for a long time on a rising tide.

But regularly – and inevitably – the tide will turn.

And when economic times are tough, that’s when you get to see which corporates don’t have such good business models and which investments are the more risky ones.

That time is now.

At the end of February and through most of March, markets tanked all round the world. The NZX 50 index fell 30 percent between February 21 and March 23. 

Source: NZX

The ASX 200 index fell 36 percent over the same 30-day period.

Source: ASX

The S&P 500 was down 34 percent.

Source: S&P

Over the whole of the first quarter of the year, the NZX 50 was down almost 15 percent; the Australian ASX 200 more than 23 percent. New Zealand’s real estate index was down 20.4 percent; the equivalent index across the ditch slumped 35 percent in the quarter.

The tide was well and truly out. Risk was well and truly exposed.

So what of our KiwiSaver funds – that money we’ve entrusted to financial gurus to invest for our retirement? As anyone who looks regularly at their KiwiSaver fund balance knows all too well, the Covid economic chaos hit them hard too. 

The latest Morningstar KiwiSaver survey shows that over the three months to April 30, the worst performing KiwiSaver funds decreased in value by as much as 13 percent. 

That’s a lot if you are close to retirement or need the money for a first home.

But here’s where it gets complicated – and Buffett’s axiom comes into play. The Covid-19-induced financial crisis revealed a big gap between the performance of different funds – even funds ostensibly within the same risk category. 

Take the 26 KiwiSaver growth funds ranked by Morningstar. 

As the table above shows, losses at the best-performing fund, BNZ, were half of those at the worst-performing one, Generate, over the height of the Covid-19 crisis. 

That would indicate there was a higher risk during the crisis for investors with money in the Generate or ASB growth funds than for those with their money in the BNZ or Kiwi Wealth growth portfolios.

The trouble for customers is that except in a crisis, there’s no way for an investor to tell which KiwiSaver funds might be most risky in a downturn.

Performance tables don’t do that when markets are strong – they measure growth but not risk.

Generate, the worst-performing fund during the crisis, is at the top of the performance table over a three-year timeframe. Milford, which ranked 18 out of 26 for the three months ended April 30 with losses of 9.3 percent, is in the number one slot in the table over the five and seven year timeframes.

Which makes sense. In theory, the higher the returns from an investment, the greater the risk.

But what about investors who don’t want to take a risk? Investors who might be close to retirement and can’t afford the value of their savings to slump? Or who want to use their KiwiSaver over the next few months for their first house, and suddenly don’t have enough for a deposit?

There appears to be no mechanism to help investors evaluate risk.

Or at least the one that exists is too crude to provide a way for investors to measure one fund against another in terms of risk.

The risk indicator

Behind each KiwiSaver scheme is something called a product disclosure statement. It’s not hard to find if you know it’s there – there’s a link on every provider website.

And part of the product disclosure statement is a “risk indicator”. As its name suggests, it’s meant to help an investor evaluate the level of risk of a particular KiwiSaver scheme. It’s a legal requirement for every KiwiSaver fund, and it’s put together using a five-year rolling average of the volatility of each fund. The more volatility, the higher the risk indicator score.

Each provider sets it out a bit differently, but basically they all show a sliding scale – from 1 to 7. The left hand side is “lower risk, potentially lower return”. The right hand side, “higher risk, potentially higher return”. There’s an arrow, or a highlighted section to indicate the particular risk of an individual fund on the sliding scale.

Each fund’s risk indicator looks similar…
…and most show a similar risk profile.

In theory the risk indicator system should help investors “understand the uncertainties both for loss and growth that may affect their investment.” That’s from the AMP KiwiSaver product disclosure statement.

“Some of the things that may cause a fund’s value to move up and down, which affect the risk indicator, are asset allocation risk, market risk, currency risk, interest rate risk, credit risk and liquidity risk.”


“You can compare funds using the risk indicator.” Great.

A risk indicator that doesn’t indicate risk

But in reality, if the present Covid situation is anything to go by, the risk indicator score has been pretty much useless at helping investors predict which funds are more or less risky. And that, to a large extent, is because the risk indicator is based not on the fundamentals of what investments make up an individual KiwiSaver portfolio, but on five years of data from a booming market, according to Simon O’Grady, chief investment officer at KiwiSaver provider Kiwi Wealth. And as Buffett says, a booming market is good at hiding risk.

Take AMP again as an example. Below is the risk indicator for the AMP conservative fund – a fund which is as risk averse as you can get at AMP without choosing cash-only.

At a ‘3’, the fund’s risk indicator is to the safe side of centre, but only a tad.

Compare it with the AMP’s aggressive fund – the company’s top-of-the-range growth-orientated fund. Here the risk indicator stands at a ‘4’ – right in the middle.

You could have been forgiven for thinking from the risk indicators that one fund wasn’t a heap riskier than the other.

Not so.

When the Covid downturn happened, AMP’s conservative fund did really well at preserving its investors’ capital. Out of almost 100 KiwiSaver funds in the Morningstar rankings, the AMP conservative fund was one of only a handful not in negative territory for the three months to April 30. Instead the fund grew a creditable 0.43 percent. Turns out the conservative fund, rated a 3 on the risk indicator scale, is super-safe in a crisis.

At the other end of the AMP scale, the company’s aggressive fund, rated only slightly higher on the risk indicator scale, slumped 11.72 percent over the same period – the third worst performer of all 97 funds on the Morningstar list.

Turns out that despite its name, the risk indicator gave investors little indication as to how risky these funds were in a crisis.

That’s the same right across the KiwiSaver funds. 

The same risk indicator for very different performance

For example, the funds in the Morningstar growth list were all rated as 4 on the risk indicator, yet as the list above shows, the worst performers were twice as risky as the best performers.

With the balanced funds, the difference was even greater. Members in the worst performing fund in the group, AMP’s responsible investment balanced fund, lost almost 9 percent of the value of their investment according to the figures for the three months to April 30. Those in the best performing fund, Kiwi Wealth’s balanced fund, lost only a third of that – 3 percent

Yet the risk indicator was the same for both – 4.

Being at the top of the league tables in the downturn makes O’Grady more frustrated than smug

O’Grady says Kiwi Wealth did really well in the latest KiwiSaver performance tables – number one among the balanced funds, number two in the growth funds.

That’s because Kiwi Wealth has a two-pronged approach – avoiding risk as well as promoting  growth, he says.

“Our approach to investment is based on, 1) the preservation of capital and 2) its growth. We have built investments that can survive these crises and thrive in the upturns to come.”

Kiwi Wealth chief investment officer Simon O’Grady says investors need to understand risk as well as return. Photo: Supplied.

But being at the top of the league tables in the downturn makes O’Grady more frustrated than smug. That’s because he says it simply exposes the flaws in the system. 

“It’s something we have been on about for a long time – saying these tables only allow you to see the returns but not the risk.

“Over the last three months, we’ve seen the risks manifest themselves. You can actually see that some providers are running more than double the risk of others.”

The rest of the time it’s hard for consumers to make informed decisions.

“Consumers are not being told what the risk is. The only measure out there to compare KiwiSaver providers is highly misleading.” 

Not all growth funds are equal

Meanwhile, the way funds are branded and categorised – growth, balanced, conservative etc – doesn’t help much, O’Grady says.

“Consumers think: ‘All these funds are in the same category, so they must be similar’. But they aren’t.”

Some KiwiSaver providers have much bigger allocations to property than others, for example, or are weighted more heavily to New Zealand or global equities, and that’s often as much a function of the history and priorities of the fund management company before it launched into KiwiSaver, he says.

Some KiwiSaver funds have more property investments than others. Photo: Supplied

Some funds hedge more than others. And some put more weight in their portfolio on assets specifically designed to protect members against downside risk, not just promote upside growth.

“We need clear reporting of risk, so investors can look at risks and returns and decide where to put their money according to the risk they are willing or able to take.” 

How do you measure risk?

The first step, O’Grady says, is to set up some sort of standardised framework that KiwiSaver providers have to use to measure and report on risk within their portfolio. 

If I was being cynical, I’d say it’s not in the industry’s best interest to shine a light on the fact our system misrepresents risk the majority of the time.

“There are standard shock tests of bank balance sheets to determine the crisis risk of that bank. We have that model for banking, but not KiwiSaver.”

“If I was being cynical, I’d say it’s not in the industry’s best interest to shine a light on the fact our system misrepresents risk the majority of the time. But it is in the customers’.”

Who monitors KiwiSaver risk disclosure?

Oversight for KiwiSaver funds’ risk management rests with the Financial Markets Authority. The FMA makes sure every fund has a risk indicator in its product disclosure statement, and provides guidelines to how fund managers and trustees should manage their investment risk.

“FMA expects Trustees to ensure they have appropriate monitoring mechanisms in place to ensure Managers are adequately managing investment risk within KiwiSaver schemes,” the FMA wrote in a 2014 report on monitoring investment risk in KiwiSaver schemes.

This includes fund trustees having “a clear understanding of, and appropriate monitoring strategies in place to reflect, the investment management strategy and specific risks of the Manager and scheme.”

The trustees must have “a process to evaluate key risks and consider the Manager’s controls over the risks, including obtaining, through appropriate testing, confidence that the Manager’s risk controls adequately identify and mitigate factors that may lead to identified investment risks”.

So it seems detailed risk information may well exist within funds. But it’s not available to KiwiSaver customers.

Investment risk a “key focus” for the FMA…

Back in 2014, the FMA looked at investment risk as an important issue.

“FMA has identified a range of risks that could arise during a KiwiSaver scheme lifecycle and which could potentially adversely impact on investor confidence in KiwiSaver. One key risk identified is that KiwiSaver Managers could fail to appropriately manage investment risk. This failure could result in sub-optimal returns for their KiwiSaver scheme members. Accordingly, monitoring KiwiSaver investment risk is a key focus for FMA.” 

…Just not any more

Fast forward five years, however, and with ten years of bull market behind it, it seems risk is far less a priority for the FMA than it was.

The authority’s most recent KiwiSaver annual report, for 2019 mentions risk on only one of the document’s 32 pages, and then only in the most general terms when talking about default savers’ risk profiles. 

The report focuses on contributions, fees and returns – but not risk.

The FMA isn’t being drawn on the usefulness or otherwise of the risk indicator. “It is not intended to be the only source of risk disclosures,” the FMA said in a statement to Newsroom.

The indicator was “a basic tool” which “should not be the only tool used to assist with decision making”.

“Where there are circumstances that may affect the risk of returns to investors, other than those already reflected in the risk indicator, managers have the option to disclose these as “Other Specific” risks.”

The FMA gave no indication it was looking at the issue.

O’Grady says Kiwi investors deserve better transparency about the level of risk they are taking, on what will likely be the largest asset they have after their home.

“It requires a standardised measure where all providers must provide a proper estimate of the loss they are likely to experience in a market shock.

“Then the tables, such as those provided by Morningstar and Sorted, need to rank providers on what is called a ‘risk adjusted’ basis so investors can compare providers on both the return they made and the risk they are taking.” 

Kiwi Wealth is a foundation partner of Newsroom 

Nikki Mandow was Newsroom's business editor and the 2021 Voyager Media Awards Business Journalist of the Year @NikkiMandow.

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