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Inflationary pressures could 'screw' KiwiSavers languishing in fixed-income default funds, Tower says After delivering above average returns through the global financial crisis, the 'golden period' of international-fixed interest is drawing to a close, signaling a necessary shift for KiwiSavers in default funds, says Tower Investment. "It's really going to start eroding the value of those savings,'' warns Sam Stubbs, chief executive officer of Tower Investment. Although Reserve Bank Governor Alan Bollard has downplayed the threat of rising inflation, Stubbs said creditor nations world-wide were driving it up to the point where New Zealand couldn't help but be affected. "Printing presses are running red hot right now, and the inflationary effects of printing all that money has been pretty subdued mostly because of an over-supply of everything - empty factories, unemployment all those things have soaked up inflationary pressure but that can't last forever. There may be no cranes around now but pretty soon these things are going to get filled up and the economy will start growing again. And at that point, you can't slam on the brakes. You're going to have to keep that growth going and then inflation picks up," Stubbs said. "Even though the Reserve Bank says we have a 0-3% target, if it's pushing at the top slowly and surely, that inflates the value. In that environment, if you're a fixed-income investor you get screwed," he said. Stubbs directed his message at KiwiSavers in default funds because the conservative nature of default funds is such that they are fixed-income investments; with a concentrated weighting of cash and bonds. See all default funds here. While default funds - the type of funds KiwiSavers end up in automatically if they do not elect a specific choice - turned out to have been a saving grace for unschooled investors, a greater exposure to more inflation-resistant assets would be necessary, said Stubbs. Stock market indices bear this out. Tower reported domestic fixed-interest (as tracked on the NZX Government stock exchange) indices fell 1.3% in the last quarter and global fixed interest (on the Barclay's Capital Global Aggregate Index) is down .9%. Domestic equities on the other hand shot up 4.4% on the NZX 50 Gross and global equities 8.4% on the MSCI World Index. Mercer New Zealand's Managing Director Martin Lewington said while it was true that mounting public debt could drive up inflation, the risk itself should not put pressure on KiwiSavers in default funds to flee them. "People need to be really honest with themselves about their appetite for risk is. It may be there’s a lot of people for whom that conservative option fits them absolutely and we just shouldn’t get carried with our view that in the long-run equities out-perform bonds because some people just can’t stomach that risk. And inevitably the equities market will go through another period of losses and if people chop and change, I know for a fact they’ll lose, they always get it wrong.'' 'All about appetite for risk' "I wouldn’t be saying that all people in default funds; `Look, it's time you get out,' because for some of those people, whether it's their risk profile, or they’re looking at buying a house, it could be a legitimate place for them. But there will probably be quite a substantial group of people that are in appropriate place where now is as good as any time to move into a higher risk profile," he said. To date, more than 1.6 milllion New Zealanders have enrolled in the national savings scheme. The pool of money, including Government employer and employee contributions, has grown to NZ$5.8 billion. Inland Revenue records show 29% (or 418,279) remain in default schemes, heavily weighted in cash and bond (fixed-income). The Government prescribed split for default funds is around 80% cash and bonds and 20% shares (which have historically generated higher-returns over-time). Over the past three years, default funds have returned 4.6% per annum _ out performing all other type of funds. 'Premature to panic' "I’m not that negative on fixed-interest,'' said Starks. "I think the returns might hold out this year. There are lots of potential hiccups out there but U.S. inflation is still forecast below 2% and unemployment isn’t going under 7%. Despite the quantative easings, the indicators are like limp squid still and will take longer to play out than people think.'' As most default funds had a some weighting in equities, as well as bonds, Starks believed any adjustments that needed to be made were minor "tweaks.'' "My gut feeling is to underweight them with what could be on the horizon, but no reason for mass panic just yet.''
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