Is KiwiSaver really investing in the future of New Zealand?

New Zealanders across the country were recently flooded with reminders to ensure they'd contributed enough to their Kiwisaver to qualify for the full Government Member Tax Credit. But what hasn't been so widely publicised is the significant transfer of wealth from the government to our KiwiSaver Investment Managers that takes place each year. In July 2017, this payment totalled just over $730m.

For such a hefty sum, ideally our largest fund managers would be putting our money to work in productive asset classes outside of public markets, and add a significant level of diversification to their offerings by introducing private equity and venture capital investments - particularly those focused on local businesses. But when looking at some of the quarterly disclosures from KiwiSaver providers, it's apparent that a few of the big managers are allocating assets with a reasonably narrow view.

A key motivation in Michael Cullen's creation of KiwiSaver was to "finance investment into New Zealand companies". It still runs true that our economy is one of the most undercapitalised in the OECD, meaning we have a significant number of successful private businesses without easy access to capital, especially in the earlier stages of growth. Unlocking some of these KiwiSaver funds would go a long way to ensuring the existence of an ecosystem which grows Kiwi companies and generates real productivity gains rather than just putting money towards the same names.

This isn't an endorsement for charitable allocations, but rather a request that the stewards of our country's retirement capital follow best practice portfolio construction.

Allocating appropriate amounts to alternate asset classes enhances return potential and reduces risk via diversification benefits. In a world where growing companies are staying private for longer, some Kiwi funds are being left behind international counterparts with their public-markets-only approach.

For example, the Harvard Endowment reported their $36b fund allocated 31 per cent to private equity and venture capital investments in 2017. Across OECD countries on average, 20 per cent of pension assets was invested in real estate, private equity and infrastructure. Closer to home, NZ Super Fund maintained a 5.5 per cent private equity allocation, with $3.2b reported to be in unlisted Kiwi assets. These asset managers all acknowledge the benefits of adding additional alternative asset classes given their long-term investment horizons - so why can't bank growth fund managers do the same?

Key reasons against the implementation of these asset classes are liquidity, expertise and fees. Thankfully, growth funds should experience significantly less withdrawals because investors are committed and a small portion of illiquid funds shouldn't stop a fund from meeting its daily requirements while still investing for the long-term. It's certainly possible to manage, with both Booster and Milford Asset Management having private equity investments in their respective growth funds.

Providers might argue that adding expertise to their teams will cost too much, however there are other options such as private equity and venture funds like Waterman Capital, Direct Capital, Movac and Punakaiki Fund. With the expertise and proven ability, KiwiSaver managers should have the confidence to allocate funds their way.

Adding higher fee asset classes might reduce short-term profitability but the long-term benefits can outweigh this cost if they generate better returns, lower volatility and attract more Kiwisavers to their funds.

The challenge for these large KiwiSaver funds is to compete on investment offerings, rather than just marketing or fees. They'll have to start diversifying their portfolios and taking the lead from best practice operators like NZ Super Fund, otherwise we miss a great opportunity to address one of the nation's key structural issues with capital markets and drive better investment outcomes for the 2.8 million Kiwis with assets in KiwiSaver.