Latest Index Fund Rebalancing: June 2024

With investing, there is a fine balance between not being engaged enough, or in some cases being engaged too much. We believe it’s important to occasionally check to see how your assets are tracking, but mainly when adjustments need to be made according to life changes or milestones.

Investments are ultimately long-term and therefore best left to ‘set and forget’. However, the world changes, and sometimes investments need to be updated or refreshed.

Finding the balance between these two concepts can be hard to gauge or discern. This is where index rebalancing is a helpful and automatic feature of an index fund.

One of the key responsibilities of index fund managers (such as ourselves) is to ensure that the balance of our funds accurately reflects the index that it is tracking.

Periodically, usually quarterly, the index provider reviews the constituents, i.e. the companies, in the index to ensure that the methodology is correctly applied and that eligibility and filters are considered.

For example, whether the Global 100 still mostly represents the 100 largest listed companies in the world, and there is not a newcomer forcing its way in. This is despite a concept called “rank buffers” to ensure that companies #100 and #101 aren’t frequently swapping places.

This most recently happened with Nvidia in June last year and is now the second-largest company in the index.

Index fund managers then reconfigure portfolio holdings to match the rebalanced index to continue to achieve their index-tracking objective.

Index rebalancing is not to be confused with portfolio rebalancing. A portfolio rebalance would involve an investor realigning their investments back to their desired proportions after the market has drifted away from their target. You can read more on what index rebalancing is and how it works in our blog here.

This month, 12 of the Kernel Funds were rebalanced: the four NZ funds, Green Property, S&P Kensho Moonshots Innovation, Global 100, Global Infrastructure, Global ESG funds and also the three currency-hedged versions of those last three funds.

For most of the underlying indices to those funds, the changes were minor (less than 3% of holdings by value) due to small additions, deletions, mainly recognising maximum and minimum holding caps, and updates to total shares on issue.

However, for the NZ 20, S&P Kensho Moonshots Innovation and Global ESG Funds, there were more material changes.

During the rebalancing period, Infratil, NZ’s largest infrastructure company announced a $1.15 Billion capital raise (about 10% of its equity base) to grow its Trans-Tasman Data Centre business and for its development pipeline of renewable energy projects across the USA, Asia and Europe.

This capital raise was very well received, oversubscribed and the share price has remained 8%+ above the issuance price. This significant change leads to an upweighting of Infratil in the index, and consequently a downweighing of the other 19 companies.

Infratil now represents about 10% of the index and is competing with Auckland Airport for New Zealand’s second-largest listed company (by free float).

The S&P Kensho Moonshots Innovation fund comprises 50 US-listed companies, headquartered globally, that have the highest Early-Stage Composite Innovation Score as assessed by the AI smarts of the Kensho division of S&P Global. This semi-annual reassessment led to 18 companies entering and 16 companies exiting the index.

Overall, 45% of the index changed by value. Notable additions are video game developer Roblox, Silicon Labs, a US semiconductor manufacturing company and NZ’s own Rocket Lab.

Meanwhile, being dropped were crypto platform Coinbase, troubled car manufacturer Nikola, and Virgin Galactic.

Kernel’s largest fund, the Global ESG Fund with around 700 constituent companies, is our most complex methodology (over 50 pages) aligned to Paris Climate Agreement targets. A notable feature of the index methodology is that it’s optimised to not substantially deviate from the overall global sector or country mix as company ESG scores change.

For example, the methodology does not simply exclude all industrial companies purely because, by nature, industrial companies are higher emitters of carbon. Rather, it upweights the best in class and down weights (or excludes) those with worse sustainability scores or transition plans compared to their peers.

Overall there were 134 removals, 68 additions; and about 18% change to the portfolio by value.

Its broad composition remains very similar, still just over 70% by value in US-listed companies, 3.9% in the UK and the remainder in 23 different countries. Similarly by sector, 27% in Information Technology, about 13% in Healthcare and less than 0.50% in Energy companies. 

The latest rebalancing highlights the benefit of an index fund over a share portfolio, where the importance of changes and associated costs would need to be individually actioned. Through fund rebalances, we ensure that your investments stay true to their respective index and promoted strategy.

Remember, these changes are a normal part of investing and are designed to keep your investments on track with the changing market. Over the long term, these periodic rebalances shouldn't keep you up at night. Instead, they should provide peace of mind knowing that your portfolio is adapting to the ever-evolving world of finance.