The now impressive size of KiwiSaver makes it a real engine of growth for the New Zealand economy. But, to realize its full potential, a wider range of investments should be considered.
At around $90 billion, KiwiSaver now accounts for around 25% of New Zealand’s GDP (gross domestic product). That’s an impressive amount of savings.
One of the many benefits of this large and growing investment pool is that it gives managers the ability to diversify and expand the range of investments they can make on behalf of members.
This is potentially a win-win situation, as more attractive and independent investment opportunities are discovered in areas of the economy that have yet to take full advantage of this capital.
A goal should be to make sure more New Zealand gets its piece of the pie
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, as we know, is that it’s not the city’s ultra-high end that’s struggling to attract capital.
The domestic fixed rate market is a clear example.
The benchmark tracked by most KiwiSaver funds is an index composed of less than 30 national companies represented. While there are currently around 2,500 large companies (over 100 employees) and over 10,000 medium-sized companies (between 20 and 100 employees) in New Zealand.
Some KiwiSaver providers venture outside the constituents of this benchmark in search of other attractive fixed interest investments.
But with only around 20 other local issuers whose bonds are listed on the New Zealand Debt Exchange, the traditional public market for fixed-rate securities does not offer much scope to lend to a wide range of large corporations. kiwi fruit.
The banking industry is changing and a new breed of lenders is emerging.
At least part of this lack of diversity is due to how banks have served Kiwi businesses in the past – leaving them with little reason to seek alternative sources of funding. But that is changing.
Stricter regulation, designed to strengthen depository institutions and reduce systemic risk, has led to increased capital requirements that New Zealand banks face. These requirements appear to be having the same effect as 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 about the size and types of loans they are willing to provide to certain borrowers.
The decline of our banks creates a void that KiwiSaver can fill.
The lending landscape in New Zealand is changing, with some segments of borrowers finding they no longer fit within the prescribed parameters of a bank’s lending policies as well as they once did.
Although banks still dominate the business lending market in New Zealand, we are seeing them slowly withdraw from areas like the ‘middle market’. Banks and their mid-sized customers, who may be too small or do not borrow frequently enough to justify resorting to the public debt market, are increasingly looking for new lending partners to help them in their next growth stage.
The potential for KiwiSaver to be part of the solution is clear. As an investor with ‘on the ground’ experience in this area, we are excited about the opportunity this presents. And due to the emerging imbalance of supply and demand in this area, investment returns are much more attractive than what can currently be achieved in the fixed rate public market.
A dynamic market for non-bank loans is also taking shape.
Another area where banks have retreated is
in the asset-backed market. These are loans secured by collateral such as houses, equipment and vehicles.
In response to growing customer needs, a group of experienced non-bank lenders have slowly increased their presence, stepping in to fill the void left by the banks.
It’s a really positive development. But since most non-banks do not take deposits, they must first find the funds they need to make the loans. This is usually achieved through a process called securitization, where the underlying asset is used as collateral to secure the required funding. However, the problem they often encounter is that, given the complexity of these structures, the typical list of potential funders is often small.
This is where experienced KiwiSaver managers can play a role. Providing funding to long-standing conservative non-bank lenders backed by large and diverse pools of sustainable assets, at attractive yields, is another important avenue where KiwiSaver can achieve positive investment results for members and Neos. – Zealanders.
KiwiSaver is a game changer for our economy
The opportunity for KiwiSaver to play a larger role in the New Zealand lending landscape is clear. In addition to those already mentioned, we see funding opportunities in infrastructure, commercial real estate, social development and green energy.
The future is bright for investment in New Zealand.
– David McLeish is Senior Portfolio Manager and Head of Fixed Interest at Fisher Funds.