KiwiSaver has grown to be worth more than $90 billion but much of that money is invested in foreign companies.

The reason for that is diversification. As investors we don’t want all our eggs in one basket – investing all of our money in New Zealand would leave us highly exposed to our small country and its fortunes.

But David McLeish, head of fixed interest at Fisher Funds, believes the money that is being invested in New Zealand could be put to better use to support and grow New Zealand Inc.

“Around 40 per cent or $35 billion of all KiwiSaver funds are invested in New Zealand. That’s a pretty great number when it comes to the impact that has on the economy – certainly on the face of it.

“But the problem that we are facing at the moment is a majority of those funds are still only invested in companies that are what we would call at the ultra high-end of town which are some of our largest most select companies in the country.”

McLeish said that money could be allocated differently in a way that would spread the risk and help fund a wider variety of local businesses.

“The key to unlocking the true potential of KiwiSaver we think is opening up the investable universe for managers to invest in a broader suite of New Zealand companies.”

McLeish said the domestic fixed-interest market was a good example of that.

Most KiwiSaver fund managers invested based on a benchmark fixed interest index that consisted of less than 30 domestic companies.

“Last time we looked there was over 2500 large companies and over 10,000 medium-sized companies in New Zealand.”

He said some KiwiSaver providers like Fisher Funds ventured outside of those 30 domestic companies.

“But actually if you look just slightly wider there is only another 20 or so domestic or local issuers of bonds or fixed interest securities that are listed on the New Zealand debt exchange.”

He said traditional public fixed interest markets didn’t really provide the scope that KiwiSaver could be used for to lend to a wider array of Kiwi businesses.

McLeish said lending to private companies could benefit KiwiSaver members by diversifying their investments and could help smooth the investment ride and ensure no one investment would have too much influence on the overall return of an investor’s portfolio.

But he said fund managers also needed to have skills and experience to be able to uncover those types of opportunities.

“The benefit is having a wider array of investments means you are not also subjecting investors to one or only a small number of macroeconomic factors like inflation for example or the direction of interest rates.

“Instead you are investing directly in businesses and therefore the returns that investors will get from those investments will be largely driven by the performance of those businesses which is much more easily researched and we can get a higher conviction on and is therefore more reliable.

McLeish said a gap had opened up to lend to more companies because banks were starting to retrench their business lending due to higher capital requirements imposed by the Reserve Bank.

“That is creating an imbalance between the supply of loans in relation to the demand in some areas and that means we are starting to see better opportunities or better investment returns from making high-quality private lending investments as opposed to those public fixed interest markets.”

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