It’s hard to ignore the fact that 2020 has been anything but an average year. The impact of COVID-19 has been felt in more ways than one, and this is evidenced by the resulting volatility in both New Zealand and global share markets. So, after a turbulent year how did our funds perform? Read on to find out.
NZ funds bounced back
All three New Zealand funds performed well for the 2020 calendar year giving a good return for investors. However, rarely does a year’s performance hide the true story so much as in 2020.
The impact of the COVID crash in March is shown in the graph below. On the day Jacinda Arden announced the first lockdown - otherwise known as “Capitulation Monday” - a minority of investors sold at any price, pushing almost every share listed on the NZX down to a low point.
However, for every seller there is a buyer and in times of great fear and uncertainty there is opportunity. Although few would have predicted the rapid recovery that occurred.
From 23 March to 31 December 2020, the NZ 20 Fund gained 48.2%. This is despite having been protected by its diversification - the stability of utilities and the opportunity for Fisher & Paykel Healthcare.
In the same period, Commercial Property and the Small & Mid Cap Opportunities Fund, whose constituents had been sold down much harder, rose 57.9% and 94.5% respectively!
Once again, the saying, “it’s time in the market, not timing the market” that proves to be the best financial advice.
Tracking difference makes all the difference
As an index fund manager, our core role is to minimise costs and drags that lead to the fund performing differently to the index. Often misunderstood or neglected by even professional investors, achieving the index return is not a given because the funds pay brokerage on trades.
For the 2020 year, after deducting our management fee of 0.39%*, the annual tracking difference was:
|
Kernel NZ Index Funds |
Tracking Difference |
|
NZ Commercial Property Fund |
-0.10% |
|
NZ Small & Mid Cap Opportunities |
+0.01% |
|
NZ 20 Fund |
-0.17% |
Normally investors in an index fund could expect the tracking difference to be equal to the management fee of the fund, in this case –0.39%. Kernel’s superior operating model, something we have put considerable time and emphasis on developing, means we can do better than this, as demonstrated in the table above. These small tracking differences show that the NZ Small & Mid Cap Opportunities fund even outperformed the index after all fees and charges were deducted! The two other funds performed considerably better than the index before fees, and in fact made all of our funds effectively the lowest cost index funds available in New Zealand. Find out more about how we track indices here.
*reduced fee for larger investors is excluded.
What about the Global funds?
In July 2020, we launched three global funds: Global 100, Global Dividend Aristocrats and Global Infrastructure.
Following the market collapse, technology stocks went on a global surge while more traditional sectors like financial services and energy lagged significantly. The difference in performance between these two sectors were the widest ever recorded. In the second half of the year, this gap began to close.
This is visible in the chart below where the growth in the tech heavy Global 100 fund reduced to a longer-term growth rate, while Dividend Aristocrats, which has a higher weighting to sectors such as financial services, energy, utilities and materials was up 11% for the final quarter.
This graph re-enforces the importance of not just looking at annual return figures when making an investment decision. The one year returns figures for our Small & Mid Cap Opportunities and Dividend Aristocrats funds are by no means flattering, but as an investor this turned out to be an opportune time to consider these funds, with the Small & Mid Cap Opportunities fund delivering nearly double the return of the NZ 20 fund since March 23rd and the Dividend Aristocrats fund outperforming the Global 100 and Global Infrastructure fund since inception.
Does this mean you should just invest in these funds?
No! What this tells you is different sectors, countries, and strategies will perform differently at different times, headline returns figures aren’t the only thing to consider when making an investment decision, and ensuring you build a diversified portfolio will put you on the best path to long term financial success.
From 15 July 2020 to 31 December 2020, the fund performance and chart of performance has been:
|
Kernel Global Index Funds |
Since Inception Performance |
|
Global Dividend Aristocrats |
9.5% |
|
Global 100 |
3.8% |
|
Global Infrastructure |
-5.8% |
While the Dividend Aristocrats stabilised in the second half of the year and had a great October, the Global Infrastructure fund has continued to underperform. Without speculating as to the rationale on 106 companies, the continued global effect of COVID-19 on these “real” assets does appear to be suppressing their growth of profitability and share prices.
Calculating returns...AKA performance
Before we explain how we calculate our returns, it’s important to clarify that performance and returns mean the same thing. They ultimately represent the change in valuation of your portfolio. Even when the value is going up, your performance can be less than ideal or below what it appears to be.
Each valuation date* we take the current market value of each of the investments in the funds (in NZD), including cash and dividends receivable and divide it by the number of units issued to all investors. This is known as the unit price.
When the unit price is multiplied by the number of units you own, it gives you the value of your investment in that fund. It’s worth noting that the current market value is the published share price of the last sale of the day, multiplied by the number of shares the fund holds and the exchange rate at 4pm London time (as the Global benchmark).
*(Wednesdays, at the end of each month and soon Mondays too)
How Kernel shows performance
At Kernel, we provide you with your personalised portfolio performance on the dashboard. That way you can see the true percentage performance of your money and the dollar value change from investing.
Our published returns, both in this update and on our website, often won’t be the same as what you see on the dashboard. This is not trickery, but due to three major effects: your “cashflow”, your timing and your portfolio.
Cashflow
Your “cashflow” is your deposits and withdrawals. Published returns, like our monthly update figures, are based on the performance of a single unit or dollar invested at the start. This is known as time-weighted returns, because only time changes the amount invested.
Meanwhile, your recent investing or dollar cost averaging requires money weighted returns to be calculated, which are specific to you. If you regularly contribute using auto invest, you will have more units in the fund at the end than the beginning, so the performance is skewed accordingly.
Timing
Your timing also affects your returns as you may not have been invested on the 1 January through to 31 December as this article refers, and/or not reinvested distributions automatically.
Portfolio
Finally, your portfolio. Currently we show total performance across all funds you hold with Kernel. We’re working on showing individual fund performance on the dashboard so keep an eye out for this! It’s important to remember that share funds are non-linear, they will fluctuate over time. Find out more about understanding investment performance here.
Tax and returns
Investors often wonder whether tax has an impact on their returns. While there will usually be tax to pay each April, we don’t include this in our return calculations.
For New Zealand funds, when we have included the tax credits you are eligible for, it is often a negligible percentage. For the Global funds, the nature of the NZ tax law means it will be 1.4% of your average investment balance across a whole year. Find out all you need to know about tax on foreign investments here.
Need more details? Get in touch with our Support team.