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By Caroline Ritchie
Kiwisaver: Locally Connected, Globally Invested
For most people, KiwiSaver will become part of a long-term plan, perhaps spanning 30 to 40 years. Long-term investing is proven to work best when it’s spread out over many different asset classes, industry sectors, and geographic regions. By diversifying your investments globally, when some investments do poorly, others will be doing better, and you limit the chance of getting ‘caught out’ all at once. This is why KiwiSaver providers invest in global markets.
#1 Why does my KiwiSaver fund include global shares?
Global shares are included in KiwiSaver funds to provide diversification, and to generate long-term capital growth. Because New Zealand makes up such a tiny part of the world share market, we must look offshore for a wider variety of share investments. Investing in many countries, compared to just one or two, further lowers your overall risk.
Global shares also allow investors to access sectors that are not available locally – for example the aerospace industry or semiconductors. Unless you’re in a cash fund it’s likely that you’ll be holding international shares as part of your retirement investment. They’re a critical part of any long-term portfolio.
#2 What types of global shares are in my KiwiSaver fund?
Most KiwiSaver providers invest in global shares by buying one or more index funds. The index fund trades as one item, but may contain thousands of shares within it. The MSCI (Morgan Stanley Capital Index) – which contains 1,647 companies and covers 23 developed countries – is one example of an index frequently used by investment managers.
Your KiwiSaver provider puts their chosen global index into funds in the amounts that fit their risk-profile allocations, as an example, maybe 20 per cent for a conservative fund and 45 per cent for a growth fund.
KiwiSaver providers have different investment preferences, but it is highly likely you will have investments in companies like Apple, Facebook, Nestlé, Disney, Coca-Cola, Nike, and Daimler. A few companies, for example Philip Morris (tobacco), do not sit happily with some investors and this is reflected in a growing movement towards more ethical KiwiSaver investment.
Many KiwiSaver funds also contain international property as part of global shares. These are also bought as an index and tend to include many of the larger international property groups.
#3 Aren’t global shares high risk and what about currency rates?
Individually, any one share in any market is risky and there are plenty of examples of international one-stock disasters. Some of these slumps overseas grab our attention because of their sheer size. Crashes like the Tech Bubble in 2001 add to people’s nervousness about investing outside New Zealand. However, global shares are vital for long-term growth and we can’t achieve that with just a few Kiwi stocks. Some countries are rated more risky than others, though the big indices, such as the MSCI, tend to have relatively small exposure to those territories.
Our shifting currency can have dramatic effects on the value of offshore shares. Sometimes you can make a significant return, only to have the exchange rate wipe that out. Most KiwiSaver providers guard against this with hedging, which basically said is taking out an insurance policy to mitigate price movements. With KiwiSaver funds this is about protecting global shares in the portfolio from big swings in the New Zealand dollar versus the US dollar (as almost all index funds are priced in US dollars). Not all providers hedge though, so it pays to check.
#4 How does globalisation affect my KiwiSaver account?
Over the last 20 years, one of the big turning points in the markets has been the rise of the index fund. In the beginning, these funds tracked a simple index, like the S&P 500. Now there are thousands of index funds that track nearly any type of indicator you can think of. They offer an amazing amount of diversification for small investment amounts and are low cost. This makes them perfect for pension funds and small passive investors.
Increasing capital flows (due to population growth and developing nations) and fast internet have created a new marketplace for these ultra-spread investments. These kinds of funds, found in the global section of KiwiSaver accounts, are investment opportunities that would not have been possible a few years ago.
In the old days, the only way to get some worldly exposure was to phone a broker in Auckland, buy a handful of stocks he or she thought were red-hot, and then hope for the best. Globalisation has made KiwiSaver not only possible, but also a safer place for all.
Caroline Ritchie is a former Authorised Financial Adviser (AFA), and a share broker and investment manager. She runs Investment Stuff, an investment-coaching service, specialising in the share market. Read more about coaching from Caroline at www.investmentstuff.co.nz. This article is not personalised financial advice.
ASSET CLASS: An asset class is a group of similar types of investment, such as shares, fixed income, and cash-equivalents. Typically, investments under each asset class have similar financial characteristics and are subject to the same compliance and regulatory requirements.
INDEX FUND: Index funds track indices such as the S&P 500 and replicate the performance of the index for investors. Index funds trade as one item, but contain many items within each fund.