Auckland March 30, 2020
KiwiSaver members are now faced with a serious market event that is making them worry about their savings. As they see their balances drop, there is a belief by some that they should be switching to a ‘Conservative Fund.’
But is this right?
The term ‘Conservative Fund’ refers to the nature of the investments that the fund offers in a document called a Statement of Investment Policies (SIPO).
We looked at the SIPO of an aggressive fund, the strictly Shariah Amanah KiwiSaver Plan because we noticed that its price has stabilised and is showing growth even amidst the Covid-19 crisis.
The Amanah Ethical website states that as on March 3, 2020, it sold about 72% of their investments to cash.
Under the Financial Markets Conduct Act definition, Amanah is normally an aggressive fund; but since the market now faces a crisis, as an active manager, it now holds substantially cash (USD).
Cash is the most conservative of investment, but in the case of Amanah, the value of the KiwiSavers Cash fluctuates with the strength of the New Zealand Dollar.
How does these definitions relate to Amanah Ethical?
The definition of aggressive and conservative funds depends on the type of investments the fund makes in normal market circumstances.
Until March 3, 2020, Amanah was a very aggressive investor in the US stock market.
In late February, our Investment Committee saw the market risk growing with the cloud of the Covid-19 virus and the risk of disruption to the world supply chains becoming blacker by the day.
At the start of March 2020, Amanah moved to protect our investors.
Our SIPO states that Amanah can hold up to 100% cash to manage volatility.
As mentioned, Amanah sold its investments on March 3, 2020, with 72% cash.
While we are correctly described as an aggressive fund, we can and have moved to hold substantial cash to buffer volatility. Cash is a very conservative investment.
This does not change the fact Amanah is still an aggressive fund, but it reflects the benefit of an actively managed fund.
This is why our members pay slightly higher fees.
Right now, our investment book is what most would see as conservative, but we are not a conservative fund because as soon as Amanah notices the market stabilising, it will aggressively re-enter the US stock market.
We may not gain in the short term, but over a five-year investment span, we believe that the benefits to our members will be real.
The message from this is part of the active management/low fees debate.
The problem as we see is that the average KiwiSaver member is ill-equipped to make a rational switching decision because, simply selecting a conservative fund now without understanding the strategy of an active manager like Amanah puts them at risk of making decisions.
This will result loss of money permanently by precipitating the present loss in market value.
For more information, please contact 021-2727566 during the Level 4 market shutdown.
Brian Henry is a Barrister based in Auckland and Managing Director of Amanah Trust Management (NZ) Limited.