The NZ 20 vs NZ 50

A question we are often asked is….

Why did we build the NZ 20 Fund and not a NZ 50 Fund?

After all the S&P NZX 50 is considered the benchmark for New Zealand; it’s on the news each night and in papers each morning.

There are a couple of factors that influenced our decision, stemming from our research and insights from international best practices. There is a method to our madness!

You can download the key insights here.

When investing in an index fund, the choice of index is often more important than the fees and the fund charges, because ultimately, it is the index design and structure that will determine what sort of performance you can expect.

As an investor, it’s important you understand what the index invests in, how it invests, and where it may sit within your portfolio.

Our research showed the S&P NZX 20 to consistently outperform the S&P NZX 50.

In fact, since the inception of the S&P NZX 20 in Jan 2007, it outperformed the S&P NZX 50 by 1.23% per annum or a total over 17 years of over 23%!

Interestingly, it was the interaction of several factors.

When we researched the NZ market over the last 15 years, we found the index composition of the S&P NZX 20 closely reflected that of the S&P NZX 50 index and the wider NZ equities market.

Both hold a diverse combination of sectors (think power companies, transport, ports, and healthcare). This has meant that the correlation of these two indices (how closely they move in sync) has been high over time.

However, there is one critical difference: the number of companies in proportion to the size of the NZ market.

Having fewer companies (20 vs 50), meant underperforming sectors and securities were dropped quicker and on the flip side, star performers were also added more quickly.

A reduction in the number of listings on the NZX has also resulted in NZ being one of the most concentrated markets in the world as seen below.

This has meant overall market performance was less influenced by many of the smaller stocks on the NZX and therefore benefitted from greater weightings in the top 20 largest companies which are the main contributors to performance. 

Another key dynamic of the New Zealand market is that many of the top 20 companies are well-covered by multiple foreign analysts and meet the criteria for offshore wholesale investors. Therefore, they attract more investment compared to the remaining companies in the S&P NZX 50.

In fact, companies outside the NZX 20 were primarily covered only by domestic equity analysts.

Finally, with a decline in the number of listings on the NZX, the top 20 companies in the S&P NZX 50 have accounted for an increasing percentage of the daily value traded - almost 80% from April 2012 -Jan 2023.

Our results showed that an increase in relative liquidity was associated with an increase in outperformance. This can, in part explain the outperformance of the S&P NZX 20 during that period.

With an overall decline in market liquidity in recent years, we believe the NZ 20 will continue to attract investors.

Finally, the outperformance of the S&P NZX 20 over the S&P NZX 50 has shown to be consistent in both rising and falling markets. The chart below shows performance since 2009 compared with New Zealand's Official Cash Rate

This pattern holds across different market conditions, time periods, and sector weightings.

• Since the inception of the index in Jan 2007 S&P NZX 20 Index outperformed the S&P NZX 50 by over 23%

• S&P NZX 20 was more volatile on the upside (it went up more in bull markets) and less volatile on the downside (it went down less in bear markets) when compared to the S&P NZX 50

• If you had access to our NZ 20 Fund 10 Years ago and invested $10,000, you would be $3,450 better off than having invested in the S&P NZX 50 index fund.

Whether or not you believe the NZ20 on its own is enough to be ‘diversified’, the data supports the idea that the NZ20 is a great core building block for investors wanting to invest in blue-chip New Zealand companies.