Our Chief Investment Strategist explains how our investment team balance risk and return to benefit your KiwiSaver portfolios — in a way that ensures the portfolio composition is appropriate for both your circumstances and the market environment.

In your kiwisaver portfolios we are able to include in a wide range of different types of assets ranging from shares to bonds to property and infrastructure.

How we mix these together depends on the requirements of the KiwiSaver member (people closer to retirement tend to need a more conservative mix) but also on the risk and return prospects of each type of assets.

I am often asked: "Why don't we just pick the assets with the best returns and own lots of them and none of the others?" However, such "market timing" (especially over short time periods) is likely to be a frustrating exercise most of the time.

Why is this? Why is market timing so difficult? It is partly because financial markets can keep going in a direction that defies logic for a lot longer than people expected. Our research shows that while fundamental valuations have a powerful influence on 5-10 year returns, the range of possible short term returns is still very wide.

Also, the catalysts that trigger turning points in markets are not always evident, even after they have happened. History shows that many of the pivotal episodes in markets lacked a single explanation for why they happened at that particular time.

However, we do know that economies do go in a cycle, moving through periods of recovery, boom, slowdown and recession. And we know that markets swing between relative euphoria and relative fearfulness.

These swings mean that even though long term investors get well rewarded for bearing the risk of fluctuations in their returns, the scale of this reward varies over time.

For example in the late 1990s investors in the US sharemarket enjoyed above average returns and low market volatility. In the late 2000s they endured lower returns but twice as much volatility. Ten years ago in New Zealand bank deposit rates were double what are they now and the risk hasn't changed that much over that time.

Clearly we live in a changing world where what the financial markets are offering investors is definitely not a fixed payoff.

So the question is how can we adapt to these changing payoffs?

At Fisher Funds we can adjust the mix of assets in a KiwiSaver's portfolio as the prospective risk and reward changes. While these portfolios will still remain appropriate for a member's circumstances, we try to ensure that they also remain appropriate for the market environment. We believe that this approach is superior to a set and forget approach where markets are assumed to offer up a constant level of return and risk.