Why are conservative KiwiSaver funds falling?

Conservative funds are usually where investors put money they don't want to see move around in value too much.

Some might have been disappointed to see balances decline through the September quarter.

Morningstar data shows the peer group average for KiwiSaver conservative funds was a loss of 1 percent in the three months to September. MAS's conservative fund lost 2 percent and Pathfinder's 2.2 percent.

In the three months, aggressive funds added 1.3 percent, while default and balanced funds were flat, and growth funds gained 0.5 percent. Moderate funds slipped 1.1 percent.

Massey University accountancy, economics and finance dean Claire Matthews said people would often think about conservative funds as being invested in bonds, which gave them interest.

"What they overlook is that there is an actual value to the bond, as well as the interest that it earns, and when interest rates go up, the value of the bond goes down and that influences what their investment overall is worth."

That was likely to continue as long as rates were rising.

"It's not going to affect all bonds in the same way, because it depends on exactly when they were issued," Matthews said. "At any time, a fund is likely to be continuing to buy additional bonds as people are investing, so they're likely to be buying current bonds at the current rate.

"It's a matter of the mix of bonds and when they were all purchased, and what the relative interest rates are. It's quite complicated."

Koura founder Rupert Carlyon said investors should expect conservative funds could fall. The same was seen in 2023, when interest rates rose sharply.

"In 2023, the bond index in the US fell about 8, 9 percent and that's not a bad proxy for 60 percent of a conservative portfolio. What you started to see is interest rates rose and went through that massive repricing of bonds, the conservative assets fell.

"There's no reason why it won't happen again. The flip side is what's meant to happen, if we move into recession or economic growth flows, and therefore, we decide that we want to drop the interest rates, bond portfolios rise and things get a whole lot better all of a sudden."

Over three years, conservative funds have returned an average 6.4 percent a year.

Generate investment specialist Greg Smith said some people may be surprised to see a conservative fund going backwards, but conservative did not mean risk free.

"These funds hold a large proportion of bonds, and when interest rates and bond yields rise, bond prices fall. That was the main driver of negative returns in the September quarter.

"It's also important to look beyond a single quarter. Negative quarters do happen, but the longer-term numbers give a much better picture of how these funds have performed."

Matthews said conservative funds were often appropriate for people with a shorter time horizon, because while they could go backwards, they were less likely to, and when they did fall, they were likely to go down less.

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