KiwiSaver Resilience: Why Global Diversification is Key to Future Returns
Despite predictions of market doom throughout 2025, KiwiSaver investors enjoyed a surprisingly solid year, with many funds delivering positive returns. But beneath the surface of these gains, a significant shift is underway. While US tech giants dominated headlines, the real winners were often found in unexpected corners of the global market – and this trend signals a crucial recalibration for KiwiSaver strategies moving forward.
Recent data from MJW’s investment survey reveals the median balanced KiwiSaver fund returned 9.8% over the year, capping a healthy three-year period. However, the survey also highlighted a changing of the guard, with Simplicity topping growth fund performance while traditional leaders like Generate and Milford experienced a weaker quarter. This divergence underscores a critical point: the investment landscape is evolving, and clinging to past performance isn’t a guarantee of future success.
The Rise of Emerging Markets and the Power of Unhedged Returns
While US markets performed well, the biggest gains in 2025 came from Japan (up 12%) and the UK (up 6.2%). More surprisingly, emerging markets, led by India’s impressive 6.2% rise, outperformed even the tech-heavy Nasdaq (20% return) with a 30% surge. This demonstrates the increasing importance of diversification beyond the well-trodden US path.
A key factor boosting returns for many KiwiSaver funds was the weakening New Zealand dollar. This benefited unhedged investments, meaning those not specifically protected against currency fluctuations. As the Kiwi dollar softened, returns from international assets increased when converted back to New Zealand dollars. This highlights the potential benefits – and risks – of currency exposure in a global portfolio.
Key Takeaway: Don’t underestimate the impact of global diversification. The best returns in 2025 weren’t necessarily found in the most talked-about markets.
Simplicity’s Success: A Case Study in Global Allocation
Simplicity’s strong performance across growth, conservative, and balanced funds suggests a winning formula. MJW principal Ben Trollip points to their higher global allocation as a potential driver of success. This strategic move allowed Simplicity to capitalize on the strong performance of international markets, particularly in emerging economies.
Interestingly, Simplicity’s allocation to home loans, rather than traditional New Zealand fixed interest, also appears to have contributed to their outperformance. With fluctuating interest rates creating headwinds for conventional fixed income investments, Simplicity’s alternative approach proved beneficial. This demonstrates the value of innovative investment strategies and a willingness to deviate from the norm.
Did you know? Simplicity’s success isn’t just about returns; their lower fees also contribute to a greater proportion of gains staying with investors.
The Long View: Why New Zealand Equities Need a Reassessment
For years, New Zealand shares outperformed their global counterparts. However, the MJW survey reveals a reversal of fortune. Over the past three to five years, New Zealand equities have lagged behind global markets, acting as a drag on overall portfolio performance. While offering lower volatility, they haven’t delivered the same level of returns.
This raises a crucial question: is a rebound on the horizon for New Zealand equities? With the potential for a turnaround in the New Zealand economy and lower interest rates, the sector *could* regain its footing. However, predicting the timing of such a shift remains challenging.
Expert Insight: “While New Zealand equities still offer diversification benefits, their recent underperformance suggests investors should carefully consider their allocation to this asset class. A home bias isn’t necessarily a bad thing, but it needs to be justified by performance.” – Ben Trollip, MJW Principal
The AI Thematic and the Concentration Risk
The increasing concentration of global equity markets around the AI thematic presents a new challenge. US equities, driven largely by tech giants, now represent a staggering 70% of global indices. This creates a significant concentration risk, making portfolios vulnerable to a correction in the US market.
As 2025 drew to a close, fears of a tech stock correction were mounting, reflected in rising search traffic related to the topic. This underscores the importance of diversification – not just geographically, but also across sectors and investment styles.
Looking Ahead: Navigating the Future of KiwiSaver
The lessons from 2025 are clear: diversification is paramount, and clinging to past performance is a risky strategy. Investors should consider the following:
- Global Allocation: Ensure your KiwiSaver fund has a significant allocation to international markets, including emerging economies.
- Currency Exposure: Understand the potential benefits and risks of unhedged investments.
- Active vs. Passive Management: Evaluate the performance of active managers and consider whether their expertise justifies the higher fees.
- Diversification Beyond Equities: Explore alternative asset classes, such as property and infrastructure, to further diversify your portfolio.
Pro Tip: Regularly review your KiwiSaver fund’s performance and asset allocation to ensure it aligns with your risk tolerance and investment goals.
Frequently Asked Questions
Q: Should I switch KiwiSaver funds based on past performance?
A: Past performance is not a guarantee of future results. However, if your current fund consistently underperforms its peers, it’s worth investigating alternative options.
Q: What is the role of currency hedging in KiwiSaver?
A: Currency hedging aims to protect your investments from fluctuations in exchange rates. While it can reduce risk, it also comes with a cost.
Q: How important is it to invest in New Zealand shares?
A: New Zealand shares can offer diversification benefits, but their recent underperformance suggests a smaller allocation may be appropriate.
Q: What is the AI thematic and why is it a risk?
A: The AI thematic refers to the growing investment in companies involved in artificial intelligence. Its dominance in global markets creates concentration risk, as a downturn in this sector could significantly impact overall returns.
The resilience of KiwiSaver in 2025, despite global uncertainties, is a testament to the power of long-term investing and diversification. However, the changing investment landscape demands a proactive approach. By embracing global opportunities and carefully considering their portfolio allocations, KiwiSaver investors can position themselves for continued success in the years to come. What are your predictions for the future of KiwiSaver returns? Share your thoughts in the comments below!
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