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Which is more important – fees or performance?

14 May 2018 by  Guy Fisher

A few recent articles have highlighted the fees charged by KiwiSaver providers and urged members to select the lowest cost options, but is this really the best advice? Our analysis of the New Zealand KiwiSaver market shows that, over the 9 years to 31 March 2017, funds with lower fees have tended to deliver below-average returns, while those with higher fees have outperformed, even after fees are taken into account.

Overseas research has shown that low cost funds tend to outperform over the long term. Perhaps the most compelling research has come from Morningstar who looked at data in the US from 2010 to 2015 and concluded that ‘expense ratio (or annual fee) is the most proven predictor of future fund returns’1.

But this is not necessarily the same for all markets. Australian superannuation research house, SuperRatings, came to the conclusion in 2015 that ‘Low fees have little correlation with fund performance or retirement outcomes … In the majority of cases, the funds with lower fees do not necessarily provide a better retirement outcome or return for its members’.2

Our analysis shows this also seems to be the case for the New Zealand KiwiSaver market.  It is clear from the chart below that the funds with lower fees have delivered lower returns, relative to other funds with the same asset allocation.

To plot all of these funds on the same chart, we have standardised the data by plotting the difference between the return a fund delivered and the average return from other funds in the same category (Conservative, Balanced and Growth).  We have made a similar adjustment for fees (since funds with a higher growth allocation typically charge higher fees).



This does not mean that fees are unimportant – but they are only one factor to consider when choosing a KiwiSaver scheme. A focus on fees tends to skew investors towards options with a more conservative asset allocation, which may not be the best long term solution for them. And, as our analysis has shown, choosing a lower cost option amongst funds with a similar asset allocation will not necessarily lead to the best outcome.

It is widely accepted that the most important determinant of investment returns within a diversified portfolio is the asset allocation decision. KiwiSaver members may be better served by taking the time to ensure that they select a fund with the appropriate asset allocation for their risk profile rather than simply looking for a fund with the lowest fees.

Fees are important, and choosing a low-cost fund may be a good option for those KiwiSaver members who don’t want to spend time investigating the different types of funds and investment managers available. However, our analysis shows that, over the last 9 years at least, the lower cost KiwiSaver options have tended to deliver below-average returns.

You can find out more about an Aon KiwiSaver Scheme fund’s performance and what fees were charged in our fund updates

1 http://www.morningstar.co.uk/uk/news/149421/how-fund-fees-are-the-best-predictor-of-returns.aspx
2 https://benchmark.superratings.com.au/media/mediarelease/27042015

Guy Fisher

Guy Fisher is an Investment Consultant at Aon. He is responsible for providing investment consulting services to a broad range of trusts and superannuation schemes. These services include the design, development and implementation of investment strategies, asset/liability modelling, investment governance (including preparation of SIPOs), investment manager selection and monitoring. Guy has more than 20 years of experience in providing investment advice, investment analysis and portfolio management to retail and institutional clients in New Zealand and the UK.

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