How benchmarks help you compare funds

Here’s a tip. You can use benchmarks to work out if your fund’s a star – or a bit of a lemon.

What’s a ‘benchmark’, and how are they chosen?

A benchmark is a market index (a group of similar shares or assets).

After looking at how your fund has performed, you can compare it to an index’s performance – whether it’s higher, lower, or the same as the index.

In this way, benchmarks help investors work out how good their fund’s performance is.

The rules require funds to pick an index to be compared to. What’s in the index has to match the fund as closely as possible – what it invests in, and the type and amount of risk.

So, if a fund invests 100 per cent in shares, it should be compared to an index of only shares. And, if the fund’s share investments are global, the index shares should be global, too.

Why should you look at indexes?

KiwiSaver members can compare the performance of their fund against the index.

If the fund’s passive, then the fund should perform close to the index’s performance. If the fund’s active, then over time it should do better than the index’s performance.

If a fund is consistently performing worse than the index, you should consider whether the fund’s provider is good at their job, and ask yourself whether changing to another provider might be the right thing to do.

Or, perhaps they are good at their job. But their fees might eat into – or even completely consume – the portion of the return that’s above the index.

This will be clear in your fund’s quarterly updates. These show members the performance of their fund before and after fees.

If high fees, possibly including performance fees, are the issue, then you should consider whether you’re getting enough in return for your money.

In both cases, members should get in touch with their provider for an explanation. There can be good reasons for a fund performing worse than an index, and your provider should be happy to talk you through it.

If they’re not, that might be another reason to think about shifting!

What indexes does the JUNO KiwiSaver Scheme use?

We’ve chosen indexes to match the assets in our funds and, for shares, the way we’ve chosen to invest.

Cash: We use the Bloomberg NZ Bond Bank Bill Index, which is the same index used for the Pie Funds Management Conservative Fund. It has performed very closely to the S&P/NZX 90-day Bank Bill Index, which is often used by other funds as a New Zealand cash index.

International Fixed Income: We use the Bloomberg Barclays Global Aggregate Index, which is an index of investment-grade debt from governments, companies and other issuers around the world. We’ve chosen it, as have many other providers, because of the breadth and quality of the debt in the index.

Shares: We use the MSCI ACWI IMI, index which is an index of nearly 9,000 shares from small, mid and large-cap companies in 47 developed and emerging countries. We’ve chosen it because it best reflects our strategy of choosing a relatively concentrated portfolio, from across the world, of the best companies we can find – small, mid-sized and large.

We report the performance of each asset group in each fund, against the index for the asset type. So, for example, we report the performance of shares versus the MSCI ACWI IMI.

You can invest in them too

We’ve also chosen these indexes because you can invest in them too.

You can invest yourself, through an exchange-traded fund (ETF) or derivative, which will typically be cheaper than paying fund fees. This makes sense if the index is consistently giving better returns than your fund.

Obviously, in KiwiSaver, members can’t withdraw their money to invest in ETFs.

But they can look for funds which use those ETFs, and which hopefully charge less accordingly, and they can transfer to them if they like.

Or, members can invest in the ETFs, as well as in the fund. In our Statement of Investment Policy and Objectives, we describe the options for each of our indexes.

Published August 2018

Story by Paul Gregory, Pie Funds

We aim to make investment with KiwiSaver easy to understand. To help us make this article reader friendly, we used The Write Plain Language Standard.

Paul Gregory is the Chief Operating Officer at Pie Funds Management Limited.  Pie Funds Management Limited is the issuer of the JUNO KiwiSaver Scheme. You can read our Product Disclosure Statement here.  This article is general in nature only and has not taken into account any particular person’s objectives or circumstances. Before relying on it, we recommend you speak with a financial adviser. All content is correct at time of publication date.