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Disclaimer
Let's begin with a warning. Performance-chasing rarely, if ever, works. The following funds did very well over the past three years, and may also do well over the next three, but you should always ensure that you are invested in a fund which is appropriate for your investment time horizon and risk tolerance, and diversified. If a substantial portion of your existing wealth is already in equities, consider whether or not you should also be allocating your KiwiSaver contributions to an equities-focused fund. It may be a better idea to balance out your overall investment portfolio's exposures to a wider range of asset classes.

Table 1: Best-Performing KiwiSaver Funds, Three Years to 30 September 2010 Calendar Year Returns

 

	2010 (30 September)	2009	2008
Fidelity Options	6.46	38.87	-8.37
Milford Aggressive	3.38	21.98	2.10
SIL International Fixed Interest	7.54	2.51	15.61

 

Options the Best KiwiSaver Option?
The best-performing KiwiSaver fund over the three years to 30 September 2010 was Fidelity KiwiSaver Options, which produced an annualised return of 11.75 percent per annum. This headline return looks great, but hides very substantial swings in volatility. The fund suffered a loss of -23.44 percent in the fourth quarter of 2008, but then bounced back the next five consecutive quarters with returns topping 42.46 percent over this period.

Fidelity KiwiSaver Options generates returns using an options strategy. Investors' cash is used as security to sell options contracts to various major banks. These options contracts are like an insurance policy for the banks, so that if the 10-year government bond rate (mainly US, but also other countries) moves unexpectedly, the bank will ask the fund to pay out on the contract to cover its losses. In return for this potential risk of having to pay out to the banks, these options contracts provide an income to the fund known as a premium. We believe this unusual KiwiSaver vehicle is not easy to understand, and is very high risk. Consider carefully and seek expert independent advice before jumping in.

Equities Surprise
Fidelity Options has no comparable peers, and sits in our Miscellaneous category. The second best-performing KiwiSaver fund over the past three years is categorised in our KiwiSaver survey as Australasian Equities. Milford KiwiSaver Aggressive returned an impressive 11.27 percent per annum over this period. This return was far in excess of any other KiwiSaver equities fund, no other Australasian equities funds having been able to deliver even positive numbers over these three years. While these results are very impressive, it helps to look behind the returns to understand how they were generated, and what risks were taken to achieve this result. Milford KiwiSaver Aggressive is run by Brian Gaynor, well-known as a market commentator, who concentrates on investing in small to medium-sized New Zealand listed companies. Gaynor and his investment team made some impressive picks, the most successful of which has been fast food franchise operator Restaurant Brands (RBD:NZ). Milford's flexible mandate meant that Gaynor was also able to generate returns from investing in bonds and currency positions. These investments made positive contributions to performance over the past three years, but it's reassuring to note that the major driver of performance was the team's stockpicks. The high cash allocation is also interesting to note. This was great for protecting against the market downturn, and an 11.27 percent return per annum with nearly half the portfolio in cash was all the more impressive. However, there is potential for a cash weighting this high to drag if the market was to shoot ahead.