Tue, 01 Feb 2011
The TOWER KiwiSaver Growth Fund - what is it?
There are six TOWER KiwiSaver Scheme funds. Five of them are “active choice” funds that investors can pick-and-choose between according to their own personal needs, objectives, and appetite for risk. The sixth is the TOWER KiwiSaver Cash Enhanced Fund otherwise known as our default fund, which is only for TOWER KiwiSaver Scheme members who have been automatically assigned to it by the IRD.
It’s no cost to move between TOWER KiwiSaver Scheme funds, with many of our default members deciding to move to a fund more relevant to them. One active choice fund is the TOWER KiwiSaver Growth Fund.
As the Fund’s name suggests, the majority of its investments are growth assets, principally shares. Shares are expected to produce a significant part of the Fund’s returns by increasing their value on the sharemarket over the longer term, although it must be remembered that shares can be volatile investments that may fall in value from time to time
Jargon buster – When we refer to ‘assets’ in a fund, this simply refers to the types of things the fund has invested into. For example, income assets include interest-earning cash and bonds, while growth assets include capital gain investments like property and shares.
So how do shares benefit investors? Basically because buying a share means owning a piece of a company in order to participate in receiving its business profits.
Imagine a company – let’s call it Universal Bikes Ltd. Suppose the company is in the business of manufacturing a range of bicycles and its ownership is divided up into up into 100 equal pieces, or shares. Suppose further that 100 individuals own one each of these shares. Collectively all these individuals are the joint owners (“shareholders”) of Universal Bikes, with each share potentially earning its owner one hundredth of the profits the business makes from producing and selling its bicycles.
If Universal Bikes makes a profit, its directors may decide to pass on some of the earnings as cash payments to the shareholders. These payments are called “dividends”. Supposing after subtracting tax and other costs, the company makes a profit of $100 and decides to distribute it all to the shareholders as a dividend. In that case the 100 shareholders would each receive a dividend of $1 earned per share.
Alternatively, the directors may decide to keep the entire $100 profit as “retained earnings” within Universal Bikes and invest this money into growing the business (usually to increase production and boost sales, create new markets, or research and develop new products). Keeping the profit within the company can add to share value, and if investing this money in business growth is successful, each Universal Bikes share may increase further in price. This increase in price is called “capital gain”. Usually companies split the profit into paying out dividends and reinvesting in the business, so Universal Bikes might distribute, say, $50 in dividends (50 cents per share) and retain the remaining $50 in the company to finance growth.
Of course, if Universal Bikes does not perform well in producing profits then the sharemarket price of each share may decrease, because there is a reduced likelihood of the company paying a dividend or being able to invest in its own growth. In a worst case scenario, Universal Bikes may fail completely in its business and go bankrupt. If this were to happen the shareholders stand to lose their investment because their shares would become worthless. Obviously it is important to avoid investing in businesses that fail, which is why pooling savings with other people into share funds whose professional managers carefully research and select a diversified portfolio of quality companies to invest in is desirable for people who are not sharemarket experts.
Supposing instead that Universal Bikes prospers and increases its profitability, its shares can become more valuable to potential buyers in the sharemarket. Willingness on the part of others to pay higher prices for shares in companies that increase profits represents a way for shareholders to make capital gains. For this reason it is best to invest in companies that are likely to make bigger profits, and to avoid companies faced with stagnant or shrinking profits.
Because it can be hard to pick the right individual companies to buy shares in, most investors who wish to have some shares in their investment portfolios rely instead on managed funds run by professional asset managers qualified to assess opportunities in the sharemarket. The TOWER KiwiSaver Scheme offers a range of managed funds, all but one of which (the TOWER KiwiSaver Preservation Fund) have some proportion of investment allocation to shares.
Growing your nest egg
The TOWER KiwiSaver Growth Fund is designed for investors who seek to build capital gains over a time period of seven years or longer. This particular fund is medium-to-high risk because of its large allocation to shares. Sharemarkets can go up and down a lot depending on business conditions in the economy, but over the longer run shares should produce higher returns (made up mostly of capital gains) than most other types of assets like cash, fixed interest, and property.
The objective of the TOWER KiwiSaver Growth Fund as at the date of this newsletter is to achieve a return which exceeds the Consumer Price Index by 8% p.a., before tax and fees on a rolling five-year basis.In order to aim for that sort of return, most of the Fund (over two thirds) is invested in shares selected from the New Zealand and international sharemarkets. The international sharemarkets represent a wide range of regions: Australia, North America, Britain and Europe, Asia including Japan, and emerging markets (like China or Latin America). The other third of the Fund is invested in assets that help smooth out the ups and downs of the sharemarkets. The other assets are New Zealand cash, fixed interest and property, and international fixed interest.
Table 1: Income and growth assets in the TOWER KiwiSaver Growth Fund
More detail on the TOWER KiwiSaver Growth Fund’s portfolio can be found in its online monthly fund fact sheet.
Who is the TOWER KiwiSaver Growth Fund suitable for?
The Fund is most suited to an investor of middle to high risk profile, meaning someone who aims to achieve a substantial amount of capital growth over a longer-term retirement saving period, and who can tolerate the potential volatility of sharemarket returns and possibility of capital loss during that time.
To help figure out whether or not the TOWER KiwiSaver Growth Fund is right for you, TOWER provides a useful online tool to assess your personal risk profile. You can access this tool by clicking on risk profiling self-assessment.
If you wish, you can switch out of your current TOWER KiwiSaver Scheme fund and into another TOWER KiwiSaver Scheme fund.
Simply log in or register for online access to your member account by clicking on the Check My Balance link in the upper right hand corner of the TOWER KiwiSaver Scheme Quarterly newsletter.
Remember you’ll need your TOWER KiwiSaver Scheme membership and plan number to register (these are shown in the TOWER KiwiSaver Scheme Quarterly email text you have received).
Best of all - it costs you nothing to switch between TOWER KiwiSaver Scheme funds.
It’s just another advantage of being with TOWER.
For further information on switching between TOWER KiwiSaver Scheme funds, please read the article Are you in the right TOWER KiwiSaver Scheme Fund?, or call 0800 379 372.
For a copy of the TOWER KiwiSaver Scheme investment statement, click here.