The great $1.4 billion KiwiSaver panic

Tuesday, 19 May 2020

Many investors caught up in the great $1.4 billion KiwiSaver sell-off in March will never switch back to a growth fund.

An exodus of panicked KiwiSavers switched from share-heavy growth funds into cash and conservative funds in March as global sharemarkets plunged, and Milford's head of KiwiSaver Murray Harris said: “Many of these members will never switch back to the fund which they came from.”

April and early May had seen a proportion of those who panicked switch back into growth funds, Harris said, but the switch had cost them dearly with growth funds having already clawed back much of their losses as markets staged recoveries.

April also saw non-KiwiSaver investors looking to buy into sharemarkets at lower prices after Covid-19-related market falls, said Leighton Roberts, founder of the Sharesies investment service, which has experienced a surge in new clients.

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**

KiwiSavers shifted $1.4 billion in March from share-heavy funds to cash or conservative funds, equating to around two per cent of all KiwiSaver money, Harris said in a web presentation to the CFA society of financial analysts.

“The concerning thing was the age of the people doing it,” Harris said.

Milford had around 2000 members switch into lower-risk funds, and many of them were a very long way from retirement.

“The average age of those members was 43,” he said.

“Given their investment time horizon, you would probably say they shouldn’t be switching from growth to conservative, unless their circumstances have changed significantly.'

Harris said the great $1.4b switch echoed fund-shifting in the December 2018 market volatility, and he noted many who switched then, had not switched back.

March was a difficult month for KiwiSavers.

At the end of December a touch under $64b and peaked in February at just under $66b, but Harris said: “The markets selling off rapidly in March in particular, with global markets down 20 or 30 per cent, and a locally similar amount, wiped about $4.5b off KiwiSaver funds under management.”

“We ended March with funds under management around $59,1b,” he said.

KiwiSaver funds were diversified funds, many holding cash and bonds as well as shares.

Some funds only dropped marginally in March, with conservative funds down 2.2 per cent in the month compared to share-heavy growth funds, which down by an average of 12 per cent.

Income drops and job losses also led to just under 140,000 people putting their KiwiSaver contributions on hold in March.

“We’ve seen panic-selling. We’ve seen panic-switching, and people really need to consider the consequences of that,' Harris said.

“Retail investors typically wait for markets to recover before they switch back in, if they do at all,” he said.

A 35-year-old with an income of $55,000 with a current balance of $20,000 making matched 3 per cent contributions who switched from a growth fund to a conservative fund and back again after two years, faced reaching age 65 with $32,530 less saved, he said.

If that person never switched back to growth, they’d end up with over $310,000 less at age 65 than if they had remained in a growth fund, assuming a return to long-term investment returns on asset classes.

Stopping contributions, and failing to restart them quickly, had similarly large impacts on nest egg forecasts.

Harris said it appeared many of those who switched in March had reversed their decision in April and May judging by fund-switching behaviour at Milford.

In April and May, Milford had seen a surge in people switching from conservative to growth funds equating to about half the number who had switched the opposite direction in March.

In April and May to date, growth funds had made gains of around 8 per cent.

Roberts said Sharesies had seen investment flows pick up in April, having dived to very low levels during the panic of March.

He put this down to a significant number of New Zealanders keen to profit from a bounce in markets.

“This is the FOMO effect,” he said, the “fear of missing out” on a share price recovery.

“A platform like Sharesies has really been sold over the barbecue really, people who talk to people who talk to people.”

Many people intended to get into investing, when they had time, and had used lockdown to to do it.

“It was always something people were going to get around to, and this was the catalyst to do that.”

New customer sign-ups went from the low hundreds in March over 2000 a day in mid-April.

Low returns on savings accounts at banks, and the inability to access other assets like property had also probably helped encourage investment, he felt.

With interest rates on accounts tipped to head even lower, he said: “From what we are hearing from our retail base, savings isn’t really one of the options.”

“Housing is still very much an aspiration of many of our customers,” Roberts said.

Just 25 per cent of Sharesies investors owned a property with the bulk of the rest investing as part of their strategy to achieve home ownership.

There was optimism that house prices would fall, making them more affordable for first-home buyers.