Are you new to investing in Kernel funds and looking at which funds to start with? Or have you been a Kernel investor for some time, and looking at how you can create a well-rounded, diversified portfolio of funds? Whichever you are, it’s important to have an understanding of how the funds can fit together to ensure you’re well diversified and not overconcentrated in particular industries, markets or companies.
We recently welcomed our 11th fund into the Kernel family, the NZ ESG 50 Tilted fund, which rounded out our new sustainable fund series. Whilst we’ve covered off specifically how sustainable funds can fit into your investment portfolio, we thought we’d extend the conversation out and look at how, collectively, all our funds can fit together.
First, a few investment portfolio basics
Before understanding how the Kernel funds can fit together, it’s a good idea to know why you’re investing, what your investment horizon is (basically when you’ll need the money back and whether that is fixed or not) and whether have a feel for your appetite for risk. Understanding yourself, your goals and reason for investing will help you determine the most suitable fund to invest in.
Then there’s the cost of accessing and holding investments – management and transaction fees – or the opportunities it presents (e.g. investing for long-term growth vs in high-yielding companies where you want the profits as dividends rather than companies reinvesting it in their growth and expansion). To dive deeper into these considerations from an index fund perspective, read our full blog here.
Building a portfolio with a core-satellite strategy
If you’ve read a few of our blogs already, you’ll know we’re big advocates for a core-satellite investing approach. In fact, we base our investment approach at Kernel around it.
What’s a core-satellite investing strategy? It’s where 80-90% of your portfolio is invested in broadly diversified low-cost index funds – the “core”. The other 10-20% is invested in “satellites” which can be more speculative investments, such as individual stocks, thematic funds and more.
Sounds great in theory, but what about in practise? Let’s take a look at how you can split the Kernel funds according to this strategy…
Investments that are considered core are generally weighted by size (largest listed companies getting the most weight) and well diversified across industries.
There are no hard rules, but 20 is about the minimum number of companies needed in a core fund to be sufficiently diversified. They’re expected to provide some exposure to most aspects of the economy, from defensive stable sectors like utilities and materials, to more cyclical sectors like communication services and consumer discretionary. You can find a description of the 11 major industry sectors here.
We consider NZ 20, NZ 50 ESG, NZ Small & Mid Cap, Global 100 and the Global Dividend Aristocrats to be core funds. While the Global Dividend Aristocrats fund isn’t weighted by the company size, it is weighted by the dividend yield, with country and sector concentration limits to keep diversified.
As of 31 July 2021, it had an allocation to all 11 sectors, with the greatest concentration in Financials (25%), Utilities (18%) and Real Estate (13%). This isn’t surprising given the yielding nature of these sectors. For an investor with a higher demand for yield (normally older, looking for a passive income), the Dividend Aristocrats Fund is a suitable core investment for the equity portion of their portfolio.
Kernel funds that can act as satellites are the S&P Moonshots Innovation, S&P Kensho Electric Vehicle Innovation and S&P Global Clean Energy funds. All three of these funds are thematic and follow a particular theme or sector. You might also choose to hold a few favourite individual companies which you feel might outperform the rest, but beware history and evidence is generally against you.
The amount of which you choose to allocate of your portfolio to thematic funds or individual companies is ultimately a personal choice. It is by nature speculative and lacking proper diversification.
We’ve found some investors like to follow the more traditional core-satellite approach of allocating up to 10% of their overall portfolio to each satellite, to tilt towards a belief in these themes. Then there are some investors who have a high risk tolerance (for market fluctuations, not permanent loss) and a long time horizon, who prefer to allocate a larger portion to speculative investments, or thematic funds.
A reasonable equity portfolio
Core-satellite investing made easy
If you like the idea of following a core-satellite strategy but are looking to keep things simple, we’ve just released Investment Bundles that can help you do exactly this.
Investment Bundles let you invest directly in a combination of Kernel funds, without individually picking the funds and amount (percentage) you would like to invest in them.
We have two bundles currently available – our Core and High Growth Bundles.
Core Investment Bundle
The Core Bundle splits your deposit between the Kernel Global 100 Fund (60%), Kernel NZ 20 Fund (30%) and Kernel NZ Small & Mid Cap Opportunities Fund (10%).
This bundle is what it says on the tin, a combination of our core funds. It can be a great starting point for investors would who like to start building a well-diversified investment portfolio, then add satellites or their own flavour to complement.
If your head is tilted wondering why this mix of funds, read on.
All three of these funds are designed for long-term growth and diversification. Each have a risk indicator of 5 (this indicates the amount of volatility within a fund, with the scale being from 1 to 7). As a reference point, most individual companies are rated 7 and cash in the bank is 1.
It is Kernel’s general view that for an individual investor living and working in NZ, there are cost and tax benefits as well as macroeconomic indicators that will lead the New Zealand market to overall outperform over the next 10 years. The 40% “home bias” in the High Growth Bundle is also similar to countries such as Singapore and Hong Kong, although not as extreme as Australia or Canada (both around 60%).
A 10% allocation to the NZ Small & Mid Cap Opportunities Fund tilts slightly to the growth potential of some smaller companies, while still having the majority of allocation into the stable and consistently outperforming NZ20 Fund.
By encompassing a mix of local and global funds, plus ensuring over 150 companies within those funds are included, the core bundle provides a well-diversified, growth option for most investors, especially those in the early stage of accumulation. When you have millions to spread around, there is benefit in being a little more granular and customised. However for the rest of us, keeping it simple makes more sense.
High Growth Investment Bundle
The High Growth Bundle differs in that it splits your deposit between six different funds – the Kernel S&P Global 100 (60%), Kernel NZ 20 (22.78%), Kernel Small & Mid Cap Opportunities (5.69%), Kernel Global Infrastructure (5%), Kernel Global Green Property (5%) and Kernel NZ Commercial Property (1.53%). It takes the core bundle and adds more “real assets” – infrastructure and real estate.
The High Growth Bundle is more suitable for those with a significant lump sum ($50,000+) to invest and then further contribute, because the allocation to property and infrastructure should reduce the overall portfolio volatility due to the their lower correlation to other equity sectors.
It was constructed based on an average Target Asset Class weightings of a sample of KiwiSaver and NZ managed funds with 80%+ growth asset allocation.
Based upon a range of capital market assumptions from major global consultants, researchers and asset managers, and conversations with multiple New Zealand asset consultants, a growth allocation of 10% to international real assets (50% hedged to the New Zealand dollar) was chosen to lower portfolio volatility and provide some additional inflationary protection.
To start investing in our Core and High Growth Investment Bundles, simply log into your investor dashboard, navigate to the Invest dropdown then Investment Bundles. Place your order from there.
Please note: This article is not intended as financial advice, just contains some ideas and investment strategies for illustrative purposes as it do not consider the suitability to your personal situation.