How do we select the funds that we recommend to our clients?
National Capital aims to help 1 million Kiwis become financially secure, so selecting the most appropriate providers and funds to ensure that your hard-earned money is invested wisely is very important to us. To achieve that, we have a robust and well-defined KiwiSaver Investment Selection Process explained on this page.
We rely on our parent company Saturn Group and its Investment Committee to research KiwiSaver funds. The process starts with a universe of widely available KiwiSaver Scheme providers managing more than 300 KiwiSaver funds between them. We then rate and rank each Scheme provider’s diversified funds and use these ratings and rankings to recommend fund for our clients.
Our investment selection process is based on six pillars that intend to help you build trust and confidence in your investments.
These six pillars are Performance, Organisation Capability, Fees, Organisation Stability, Processes & Portfolio Composition and Ethical Investing Considerations.
A. Performance
A fund’s past performance may not necessarily indicate future success. However, history does give us valuable information. Suppose a fund manager has been consistently achieving a high rate of return over a long time frame. It is likely this is based on a robust investment process, having a quality investment team with great investment insights, and not charging excessive fees. We would rather invest with such a manager than one with consistently sub-standard results.
National Capital screens its funds’ coverage by measuring each individual fund’s performance against its peers, which is part of our Investment Selection Policy. We want to ensure that your savings are growing, and ensuring that your money is invested in funds with a great historical performance relative to its peers is a great place to start.
B. Organisation Capability
This pillar is perhaps the most overlooked by individual investors when selecting a fund. While the performance and fees of a fund are important, evaluating the capability of the organisation to manage your money well is an important box that needs to be ticked. This pillar looks at the people managing your money, their experience and expertise, how long they have been with the organisation, and the resources available to do their jobs well. The success of the organisation in growing its business will, in turn, impact its ability to attract the right people.
C. Fees
The third pillar is fees. However, rather than just take an extreme view that fees are the only aspect you should consider when choosing KiwiSaver providers, we base our selection on value for money. This allows our clients to be invested in funds that charge a reasonable fee while still delivering good returns.
We also understand that the fees charged by KiwiSaver providers can vary according to the service they provide, such as active funds management, responsible investment funds, and, importantly, access to Financial Advice.
A study by Vanguard concluded that access to financial advice could add up to three percentage points per annum or more in net returns. Currently, schemes vary significantly in access they provide to a financial adviser for their members.
Ultimately, we look to achieve a balance in fees charged and services provided to ensure that Kiwis end up better off in the long run.
D. Organisation Stability
In order to make informed decisions, we believe it is essential to assess the stability of the organisation responsible for managing the funds. The Saturn Investment Committee evaluates things such as any key investment team departures or arrivals.
E. Processes & Portfolio Composition
Our advice is based on what type of fund is appropriate for a client. The determination of the type of fund is based on the asset allocation of the funds, so it’s very important to ensure that we check that funds are true to label. For example, a fund labelled a Growth Fund should have an asset allocation consistent with a typical growth fund and not morph into an asset allocation more typical of a conservative fund.
To ensure that we are comparing apples to apples, we check the asset allocations for each fund we research. If a fund’s asset allocation is inconsistent with its fund type, this will negatively impact its rating.
F. Ethical Investing Considerations
Ethical investment, also known as sustainable or responsible investment, is an approach that takes into account Environment, Social and Governance factors in the investment selection process.
Our Investment Committee uses third-party research to evaluate KiwiSaver funds’ screening processes and sustainability scores. This ensures we are “looking under the hood” rather than simply relying on claims made in marketing material.
We run through the following process on a quarterly basis.
We review the universe of widely available KiwiSaver providers and their diversified funds. We use the FMA disclose register as our starting point for all fund data. The categorisation of funds is broadly done as follows.
Qualitative adjustments for certain funds are performed if the asset allocation does not truly represent the type of fund.
We exclude any providers for whom insufficient public access or data is available. This may be either because the provider is too small, is a restricted provider not available to the general public or has chosen not to provide data to research houses. The providers that are currently excluded are as follows.
Next, we apply exclusions to the list per the criteria noted below. This is done to ensure we are not considering non-diversified funds, geared funds, duplicate funds or funds which do not have a fixed asset allocation.
We will not take lifecycle funds into consideration since they have a variable asset allocation that changes with time. As our clients are advised regularly, we believe they should make asset allocation decisions depending on their personal circumstances rather than on a single factor such as age.
In addition, some ‘duplicate’ funds have the exact same portfolio composition but are distributed by different schemes. We exclude these duplicate funds from consideration, keeping only the fund with the lowest fees in our selection process.
The final sample list remains comprehensive and covers around 90% of the total funds under management (FUM) in the KiwiSaver universe. Please contact us for the latest fund list.
Our Investment Committee then gathers data for our six pillars from various sources, including research partners.
The data collected is then analysed and scored by our proprietary process. The scoring process calculates each fund’s overall rating (A-D) based on the following weightings.
| Criteria | Weighting |
|---|---|
|
Performance Max points, midpoints or no points are awarded based on
These subpoints are calculated into a percentage out of 25 points on offer for this criteria. |
25% |
|
Fees |
15% |
|
Organizational Capability An assessment of people who are responsible for running the portfolio, including their relative experience and time working together as a team, the business structure and systems & software used. This factor seeks to uncover managers with specific issues due to being a new business or lacking resources that we want our clients to be clearly informed of. |
20% |
|
Organizational Stability Good organisations reward staff and have stable and well-resourced teams. This factor scores fund managers on the investment team’s stability and penalises those with a high staff turnover. |
10% |
|
Process & Portfolio Composition Good investment results come from a well-defined investment process that includes diversified portfolios which are aligned with the fund’s stated objectives. Here we assess the underlying investment strategy to ensure it aligns with our expectations. |
20% |
|
Responsible Investing Considerations This is a combination of MyFiduciary specialist research notes plus Sustainability points based on the actual fund holdings within each fund. |
10% |
|
Total |
100% |
| Top 25% | 26-50% | 51-75% | Bottom 25% |
|---|---|---|---|
|
A |
B |
C |
D |
Each fund’s A, B, C or D rating from the last four quarters is then weighted and summed to give a rolling weighted average which helps avoid frequent changes based on performance or fees. For example, at the end of the March 2022 quarter:
| Fund | June 2021 Rating | Sep 2021 Rating | Dec 2021 Rating | Mar 2022 Rating | Rolling Weighted Average Rating |
|---|---|---|---|---|---|
|
Weighting |
10% |
20% |
30% |
40% |
100% |
|
Provider X Balanced Fund |
A |
A |
A |
B |
A |
|
Provider Y Balanced Fund |
C |
C |
C |
D |
C |
|
Provider Z Balanced Fund |
B |
B |
A |
A |
A |
Note: Our selection criteria for Cash Funds differs slightly from other types of funds. The most important considerations for a Cash fund should be low fees and minimal volatility.
The final ranking data and notes are then presented to the Investment Committee (IC) for review and discussion. The IC currently consists of:
This expert scrutiny provides an opportunity to challenge the outcomes of the scoring process.
For example, if, despite high ratings, there are concerns regarding a KiwiSaver provider’s ability to generate future returns because of factors such as organisation instability, or structural changes taking place in the business, the IC can make decisions that may override the score-based ratings. This can lead to a specific provider not being recommended until the IC is satisfied with the outcomes of changes at the provider.
Exceptions to the Investment Selection Process
1. Specific Client Circumstances or Preference
We pride ourselves on providing personalised advice to our clients. In certain cases, we might recommend funds that fall out of the above Investment Selection Process. This would only be in the case of a specific client circumstance or preference. In such cases, we will inform the client of the deviation from our standard Investment selection process and explain the reasons why.
Are we independent?
Our investment selection process is not biased towards any provider we have a commercial arrangement with. We are legislated to follow a code of professional conduct in which we must treat clients fairly, act with integrity and give financial advice that is suitable. We intend to do that anyway since it’s the right thing to do. Our ethics policy and values can be found below.
