26 October 2022

    The growing economic importance of KiwiSaver

    David McLeish

    Head of Fixed Income

    Email David
    David McLeish

    Head of Fixed Income

    Email David

    KiwiSaver has fast become an asset of national importance, with its benefits stretching well beyond the positive saving habits it has instilled and the substantial retirement nest eggs it has helped us create. The now impressive size of KiwiSaver makes it a genuine driver of growth for the New Zealand economy. But to deliver on this potential, a wider array of investments must be considered. The imminent launch of our first domestically focused private debt fund is an exciting example of how we intend to ensure more KiwiSaver funds reach more of the New Zealand economy.

    At around $90 billion, KiwiSaver is now approximately 25% the size of the New Zealand economy. That’s an impressive amount of savings. 

    One of the many benefits this large and growing investment pool brings is that it gives us the ability to diversify and broaden the range of investments we can make on your behalf. This is potentially a win-win situation, as more attractive and unrelated investment opportunities are uncovered in areas of the economy that are yet to feel the full benefit of this capital. 

    Our goal is to ensure more of New Zealand gets their piece of the pie

    When looking across the industry, only a small portion of KiwiSaver funds are invested outside of a small group of our country’s largest companies. The problem here is, as we know, it’s not these large companies who have trouble attracting capital.

    The domestic fixed interest market provides a clear example of this. The benchmark that most KiwiSaver funds follow is an index with less than 30 domestic companies represented in it. While there are around 2,500 large companies (100+ employees) and over 10,000 medium-sized companies (between 20-100 employees) in New Zealand currently. That means many New Zealand companies could be missing out on valuable investment.

    Some KiwiSaver providers do venture outside this benchmark’s constituents in the search of other attractive fixed interest investments. But with only around 20 other local issuers with bonds listed on the New Zealand Debt Exchange, the traditional public fixed interest market does not provide much scope for lending to a wide array of great Kiwi businesses.

    A new breed of lenders is emerging

    At least some of this lack of diversity in the public fixed interest market is because of how well the banks have served Kiwi companies in the past – leaving them with little reason to look for alternative funding sources. But this is changing.

    Tighter regulation, designed to strengthen deposit-taking institutions and reduce systemic risks, has seen a ratcheting up of the capital requirements New Zealand banks face. These requirements appear to be having the same effect they have had in many other parts of the world including the United States, Europe, and Australia.

    These pressures are causing our banks to become more selective around the size and types of loans they are willing to make to certain borrowers.

    The retreat of banks creates a gap that KiwiSaver can fill

    New Zealand’s lending landscape is shifting, with some borrowers finding they no longer fit as neatly inside the prescribed parameters of a bank’s lending policies as they once did.    

    Although banks still dominate the corporate lending market in New Zealand, we are seeing them slowly retreat from areas like the ‘middle market’. It is here that banks and their medium-sized customers are increasingly looking for new lending partners to help with their next stage of growth.

    The potential for KiwiSaver to be part of the solution is clear. As one of the few investment teams with deeply experienced ‘boots on the ground’ in this area, we are excited by the opportunity this presents. And because of the emerging supply and demand imbalance in this area, the investment yields are much more appealing than what can currently be achieved in the public fixed interest market.

    A vibrant non-bank lending market is taking shape

    Another area where banks have been pulling back is in the asset-backed market. These are loans backed by collateral such as houses, equipment, and vehicles.

    In response to growing customer need, a cluster of experienced non-bank lenders have been slowly increasing their presence, stepping in to fill the void being left by the banks.

    This is a really positive development. But because most non-banks do not take in deposits, they must first source the funds they need to make the loans. This is typically achieved through a process called securitisation, where the underlying asset is used as collateral to secure the required funding. The issue they often find though is that, given the complexity of these structures, the typical list of would-be funders is often small.   

    Our investment team has been building partnerships with a select group of these non-banks for over 10 years now. We think these strong relationships and deep understanding of their business gives us a unique position to support their efforts to provide businesses with access to funds they are increasingly finding hard to source from the banks.

    We believe providing funding to a select group of conservative non-bank lenders, backed by large and diversified pools of ‘hard’ assets, is another important avenue where KiwiSaver can achieve mutually beneficial outcomes both for KiwiSaver members and for all New Zealanders.

    KiwiSaver is a game changer for our economy

    Beyond this, we also see opportunities in areas like private equity, infrastructure, venture capital, agriculture and forestry – that have the potential to form part of the KiwiSaver landscape in the years ahead.

    The future is bright for investment in New Zealand.

    You can hear more from David McLeish on how KiwiSaver could be used to better utilise a business’ potential in the latest Continuous Disclosure podcast.

    If you would like to talk to someone about Fisher Funds KiwiSaver Scheme or our Managed Funds, please contact us, the team at Fisher Funds are here to help.