Why We've Reviewed Kernel's Strategic Asset Allocation

As most of you will be aware, the real task of a Strategic Asset Allocation (SAA) review is to ensure the chosen strategic mix remains fit for purpose as market structure, valuations, and investor needs evolve - without drifting into short-termism. That’s exactly why we’ve just completed a comprehensive SAA review of Kernel’s diversified funds.

At a high level, our aim is unchanged: deliver resilient, risk-adjusted outcomes through full market cycles using a transparent, rules-based asset mix and a disciplined rebalancing framework. What evolves are the inputs and the implementation: capital market assumptions, concentration risk, regional balance, role of real assets, currency policy, and peer comparability for NZ investors. Think of it as reaffirming the investment compass, not redrawing the map.

In this post, we'll walk you through the why and how of these updates, drawing on our latest review. We'll break it down fund by fund, highlight the practical implications for your clients, and include a handy chart of the new allocations.

Markets don't stand still, and neither should a good SAA. We kicked off this review by crunching fresh data on expected returns, risks, and correlations. We looked at everything from global valuations (e.g., US stocks looking pricey compared to emerging markets) to real-world risks like geopolitical tensions or inflation spikes. We also benchmarked against peers in the KiwiSaver space to ensure our funds stack up for NZ investors, who often have home biases like property ownership. We worked in partnership with industry experts to ensure we considered alternative views and tested our own.

The process was thorough but straightforward: Start with core principles (maximise growth while managing risks), test scenarios through full market cycles, and tweak for better diversification. No knee-jerk reactions to short-term noise – just smart adjustments to help clients weather storms, whether it's another GFC-style dip or a tech boom.

Let’s take a closer look at each fund, examining what’s changed in the reference portfolio, why it matters, and how those shifts can benefit your clients. You can explore more details in the SIPO located in our Resources section.

This fund is for clients chasing big long-term gains, like young professionals building wealth over decades. Here we've refined asset allocation to incorporate our new funds in the mix as per the changes below.

Key changes to the reference portfolio, and the reasons:

• Near-Full Throttle on Growth: We're bumping growth assets to 99%, with just 1% cash for wiggle room. Why? Low liquidity needs mean we can stay invested to capture more upside, like riding the full wave of a bull market. It's practical – clients get maximum exposure without unnecessary drag.

• Spreading the Bets Globally: We've split US and global equities more evenly (e.g., 12.5% each to S&P 500 and ex-US developed markets). This drops US concentration from 71% to about 56% in non-NZ equities. History shows over-reliance (like Japan's 1980s bubble) can bite. Plus, ex-US and emerging markets (now 7%) look cheaper and offer diversification – great for NZ investors facing our dollar's swings.

• Keeping Tech in the Mix: Boosting Kernel Global 100 to 33% (split hedged/unhedged) maintains exposure to AI and tech trends, but at a safer 22.5% of the portfolio.

• Regional Tweaks: NZ equities drop to 20% (from 30%), freeing space for 4% in Australian ASX 100. Australia complements NZ's defensive sectors with resources and financials, adding stability.

• Inflation Shields: 10% in real assets (7.5% infrastructure, 2.5% property) for better protection during rising costs, as these often hold value when cash doesn't.

For your clients, this means potentially smoother rides through volatility, with expected returns that hold up better over time. This helps us manage risks like US overvaluation.

Aimed at middle-ground investors, like families balancing growth with some safety nets. We've aligned the growth side (60%) with the High Growth tweaks (minus small NZ caps for ease) and kept 40% in fixed income.

Why? It keeps things consistent across funds.

This is our bridge for risk-averse folks, like retirees or first-time investors wary of big jumps. A new addition to the Kernel diversified range with 30% growth assets (10% real assets, 15% international equities, 5% NZ equities), and 70% in fixed income (27% global bonds, 25% NZ bonds, 18% cash).

Our line up had a big risk leap from cash-plus to balanced – this 30% growth slot smooths that out. It's a tad higher than KiwiSaver averages but offers better inflation protection via real assets (same 75/25 infrastructure/property split). Why favour infrastructure? It hedges inflation better and has stronger earnings potential, helping portfolios in environments like NZ's recent cost-of-living squeeze.

For advisers, this expands your options for clients needing low volatility but some growth to beat inflation.

We hedge selectively: Full for fixed income and real assets to lock in stability; 50% for developed equities to balance volatility and upside; unhedged for emerging markets and Australia (due to high NZD/AUD correlation – over 92% historically, even in crises).This reduces unnecessary risks while keeping the perks of diversification.

Here's a clear snapshot of the updated reference portfolio allocations across the funds. We've kept it simple so you can share it directly with clients.