Is the investment performance of my portfolio good?
An important question to ask and know the answer to. When you look at your Kernel dashboard, or an investment such as your KiwiSaver, you might notice that your performance or “returns” don’t match the Funds published performance figures.
There are lots of legitimate reasons as to why this is the case, which are worth being aware of. Some of these reasons will help you understand why you have done better or worse than the published figure.
For the purpose of this discussion is important to clarify something – 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.
Not all returns are calculated equal
First is to be sure that you are looking at the same thing. So, that if you are comparing your portfolio returns to that of a published figure, it is apples for apples. Performance can be published excluding fees and charges and/or excluding tax. Both of course are a cost which you pay and should consider.
Excluding the tax is reasonable as investors are on different tax rates based on their PIR. Remember: tax is only calculated on the income received, not the capital gains/increase in valuation. Oftentimes there are also tax credits that will offset some of your tax payable.
For example, with Kernel, tax is only paid in April each year or when you sell a majority of your units in a fund. That way you stay invested longer and benefit from the use of that tax liability.
Reviewing performance figures excluding fees and charges, however, is harder to justify and becoming less common. Something that you do need to consider, particularly if you have a larger balance, is fee tiers or rebates. For example, Kernel investors with over $25,000 invested in their portfolio, receive a 0.10% p.a. fee rebate. Despite this, because it doesn’t apply to everyone, we publish our performance figures excluding the full fee.
Total return = dividends + capital gains
Second is to understand the difference between price performance and total performance – a common confusion also made in the media. Price performance is just the capital gains and excludes the income from interest and dividends.
Total performance, meanwhile, includes both. It’s the reinvestment of income and its compounding where much of the gains are made.
This then extends to the benchmark to which you are comparing. While both price and total performance are available, one is standard. The S&P/NZX 20 is commonly published as total performance, but the S&P 500 is commonly published as only a price performance.
Simplistically think of it this way: if a company pays out all its profits, how is the company worth more? Yet if the company holds on to that profit and opens new locations/businesses it may grow in value. Or if you have reinvested any dividends received, in effect buying more shares, you receive a greater proportion of the profit.
That’s why one of the normal asterisks (*) to performance data is “dividends reinvested”. It is also why we encourage distribution reinvestment for most investors, so you keep all your investment at work.
How to know “am I making money?”
Third is the effect of your “cashflow” – 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.
Let’s take an example. If you deposit $1,000 a month for 3 months, in the first month you are receiving a return on $1,000, but in the third month on $3,000. So a negative first month may be dwarfed by a positive third month or vice versa.
Kernel provides you with your personalised performance on the dashboard. That way you can see the true percentage performance of your money and the dollar value change from investing.
Overall, its your increase in wealth from investing that really matters. However, it’s important to remember that share funds are non-linear, so they will fluctuate.
The comforting part is this: history has repeatedly proven to invest is the most certain way to increase your wealth without either lots of effort or luck. And that’s the goal isn’t it?
If you need help understanding your returns or have questions about performance – contact us below.