16 February 2026
Beyond Passive: Navigating NZ Fixed Income with Kernel Portfolio Manager Matt Winton
Matt Winton BSc, has been with Kernel for 3 years and is manager of Kernel's Fixed Income, Cash and Diversified Funds. Matt has over 32 years industry experience, both in NZ and overseas including Citibank and BNP Paribas.
Kernel is well known for its low-cost index-tracking equity funds. Why take an active approach for the Kernel NZ bond fund?
In New Zealand it’s hard to run a truly passive fixed income fund. The bonds you want often aren’t available on the day an investor applies, and liquidity can be patchy. That’s why I say there are no truly passive fixed income funds here, only quasi-passive ones.
On top of that, the structure of fixed income markets is different from equities. In equities, trading is primarily on the secondary market against other informed investors who are all trying to “out-analyse” each other.
In fixed income, the Government is one of the most important participants, and its motivations can go beyond just minimising its interest cost: things like stimulating the economy or providing liquidity (as we saw through Covid). That means that an active manager has a higher chance to add value to a portfolio in a way that’s harder in equity markets.
For high-net-worth clients, how does investing in a PIE-structured bond fund compare to buying bonds directly in terms of net returns?
There are three big areas: tax, liquidity, and execution.
Tax: A PIE bond fund is capped at 28%, versus a 39% top personal rate for many high-net-worth investors. Even at the 33% bracket, that’s around a 5% per-annum saving on the tax rate applied to income.
Liquidity and costs: when you invest in the Kernel NZ Bond fund there’s no brokerage, no bid-offer spread paid to enter or exit, and you trade at the fund’s unit price*. We price our underlying bonds at mid-market using independent data sources. By contrast, with direct bonds you may be restricted on price when you buy or sell. There’s also the question of capturing the new-issue premiums. Direct investors sometimes hope to take advantage of new issues, and that can work, but only if you have cash available exactly when a suitable deal comes to market. In a fund, I’m continuously in the market and can move between issues as they become available, so investors benefit from that activity without having to try and time it themselves.
Kernel also offers two Target Dated Maturity funds: the March 2027 NZ Bond fund and the March 2029 NZ Bond fund. How should advisers think about these versus a traditional open-ended bond fund?
Target Dated Maturity funds are seen across the globe, but Kernel is the only manager to offer them in New Zealand. These funds aim to act like a bond. The key advantage is that they give you much more control over duration and interest rate risk with the liquidity of a fund.
If a client has a defined cash flow need – say a major construction project where they need funds available in a year when part of the project completes – a target maturity fund that lines up with that date can be a good way to match assets and liabilities, with relatively low risk.
They’re also useful in retirement planning. A retiree might want an “annuity-like” stream: some money next year, some the year after, some three years out. You can ladder target maturity funds to line up with those needs and then consider equities for the money they won’t need for five years or more. For the shorter-dated, low-risk part of the portfolio, these funds can be a neat fit. They also offer an alternative to a laddered portfolio of directly held NZ bonds: control over the duration plus the liquidity and security of a fund structure.
How are you thinking about the trade-off between yield and credit risk in the NZ bond market right now?
Not all bonds we buy are NZX-listed, but a sizeable number are. Broadly, credit spreads are reasonably tight, and that’s part of a global trend. There is some leverage in the global system, which has helped push spreads narrower, so I wouldn’t describe credit as “cheap.”
That said, there are always selective opportunities. My job is to try to optimise the fund so that the expected return properly compensates for the credit risk we’re taking. There are securities we hold that I think are reasonably priced on that basis – that’s why they’re in the portfolio.
With the recent moves in the Official Cash Rate, what’s your outlook, and how does this feed into spreads and reinvestment risk as older, higher-coupon bonds mature?
We’ve had a very large rate cutting cycle, arguably too much given how leveraged the New Zealand economy is to interest rates. As mortgage rates fall and people refinance at lower rates, there’s a strong stimulatory effect, and it takes time to fully show up in the economy. A lot of borrowers are still rolling off older, higher mortgage rates.
More recently, markets have pulled back from the idea of imminent cuts, and we’ve seen a decent sell-off as it became clearer that the next move is more likely to be a hike. That’s pushed swap rates higher, especially at the shorter end, because so many borrowers have been fixing for two years or so. Shorter interest rates have arguably moved wider than fundamentals alone would justify.
In terms of reinvestment risk, a few years ago the bond market was offering very high coupons. Today, yields have backed up from their lows, and we’re now seeing more like 4.25% for high-quality credit with medium duration, versus an OCR around 2.25%. It seems reasonable to me. It may not feel as attractive as 5–6% coupons did, but given where policy rates sit, investors are, in my view, being fairly compensated.
What would you most want advisers to keep in mind when discussing Kernel’s bond funds with clients?
When clients use a bond fund instead of going direct, they’re getting several layers of value:
- Tax efficiency through the PIE structure at a low cost,
- An active manager whose job is to monitor markets, assess relative value, and trade on behalf of their clients,
- Participation in and benefit from new issuances,
- Better liquidity: the ability to get in and out as clients require.
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*The information provided is of a general and educative nature and does not purport to be, nor should it be construed to be, specific professional advice for any person. The information presented is believed to be accurate and reliable as at 18 February 2025 and has been prepared in good faith based on information from sources deemed trustworthy. While Kernel Wealth Limited has made every reasonable effort to ensure the accuracy and reliability of the information presented, we do not guarantee its completeness or accuracy. The views and opinions expressed are those of the speakers and may not necessarily represent the views or opinions of Kernel Wealth Limited.
For comprehensive information about funds, please refer to the Offer Documents available at Kernel Wealth | Resources & Documents. Past performance is not a reliable indicator of future performance. The value of investments may rise or fall, and returns are not guaranteed. Independent professional advice should be obtained before making any investment decisions or relying on any aspects of this article.
*Swing prices may be applied in certain circumstances. Refer to Scheme offer documents for more details.
