Your Quarterly E-Zine
Edition 11 • December 2019

This website contains the latest edition of Forsyth Barr Focus, a quarterly on-line magazine written by senior members of Forsyth Barr's investment team.

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If you are a KiwiSaver member investing in a multi-asset fund (for example, a defensive, conservative, balanced or growth fund), have you thought about how the investment manager decides on the target asset allocation and how much to invest in each of the underlying asset classes?

Our impression, after a quick look at a number of independent surveys, is that the majority of KiwiSaver money is invested in multi-asset funds, highlighting that they are an incredibly popular investment choice.

The Financial Markets Authority (FMA) provides direction to managers of registered managed investment schemes, like us at Forsyth Barr Investment Management, (we manage the Forsyth Barr Investment Funds and the Summer KiwiSaver scheme). In its guidance note on risk indicators and description of managed funds, the FMA sets out certain conventions that it expects Investment Managers, like us, to follow. For example, looking at an investment fund that incorporates the word “balanced” in its name, the FMA expects the amount of investments in “growth assets” to be within a 35% to 63% range. Furthermore, the FMA anticipates that the investment risks associated with a “balanced fund” should typically result in a “medium” movement up and down in the value of your investment.

We also consider a further step – what will be the potential return of any investment approach, in this case, a “balanced” strategy? To do this, we calculate for each of the asset classes a forward-looking set of (1) expected returns, (2) volatility forecasts (i.e. assumptions on how much each of those asset classes will go up and down in value over the forecast period) and (3) correlation assumptions for each of the assets classes; (i.e. do they generally move in the same direction in value or move differently?) Indeed, government bonds tend to move up in value in times of financial stress, while international equities tend to move in the opposite direction when market uncertainty and investor angst rises, (think October through to December last year!).

Solving for a series of volatility and correlation expectations tends to be the easier job, where we primarily rely on historical data.

Generating a credible set of forward looking return expectations is a different matter. Who really knows what the future return on any investment will be? It is almost akin to asking, “how deep is a hole” or “how long is a piece of string”?

In simple terms, we look at past returns and then consider what we think the enduring influences are likely to be on future investment performance. The best example here is domestic fixed interest. In general, gross returns (excluding fees, charges and deductions for tax) over the last decade have been close to 6.00%. However, with inflation (a key driver of fixed interest rates) likely to be contained at historically low levels by Central Banks, we have lowered our forecast for returns from New Zealand fixed interest to be well below the norm, opting instead for a lower gross return closer to 4% than the historic 6%.

Rolling-up this methodology and applying it to our Summer Investment Selection (a multi-asset fund offered in the Summer KiwiSaver scheme that generally adopts a “balanced” investment approach), our modelling creates a target asset allocation as shown in Figure 1.

Figure 1. Summer Investment Selection target asset allocations and ranges as at 31 January 2019

The modelling and selection of target asset allocations and associated ranges also allows for “tactical asset allocation”, or desired shorter-term deviations from the target asset allocation. This is a very important tool in an active Investment Manager’s toolbox, in our view, as we don’t permit or promote a set-and-forget investment attitude.

If you are thinking about how best to invest your KiwiSaver funds, why not check out our investment profile tool on the Summer website and maybe have a go at using “My Plan” to construct a customised multi-asset portfolio that meets both your return and risk expectations? We can also give you a hand – talk to your Forsyth Barr Investment Adviser, or call one of our Savings Specialists on 0800 11 55 66. 

Craig Alexander
Head of Funds Management

For a printable PDF of this article click here

This is not a recommendation to buy or sell any financial product and does not take your personal circumstances into account. All opinions reflect our judgement on the date of communication and may change without notice. Past performance is not a reliable guide to future performance. We recommend you take financial advice before making investment decisions. We have prepared this information in good faith based on information obtained from other sources, but we do not guarantee the accuracy of that information. We do not make any representation or warranty (express or implied) that this information is accurate, complete, or current and to the maximum extent permitted by law disclaim any liability for loss which may be incurred by any person relying on this information.

The Summer KiwiSaver scheme is managed by Forsyth Barr Investment Management Ltd. You can obtain the Scheme’s product disclosure statement and further information about the Scheme at, from one of our offices, or by calling 0800 11 55 66. Forsyth Barr Investment Management Ltd is a licenced manager of registered schemes and part of the Forsyth Barr group of companies. Disclosure statements are available from Martin Hawes or a Forsyth Barr Authorised Financial Adviser on request and free of charge.