Kernel Index Funds Review
May 24, 2020
Under the “Our Story” section on the Kernel website, they say the following: We encourage open and free sharing of opinions so that everyone feels as though they can collaborate and contribute.” Not the usual spiel you would find on a fund manager website, don’t you agree?
I first met Dean Anderson, the Founder and CEO of Kernel back in 2016 when I first started The Happy Saver blog. At the time he was working for the NZX so already had a comprehensive background in the financial markets and running index funds and ETF’s and I’d emailed him with a question specifically about SmartShares. I don’t know quite what I expected but I know I was surprised to receive the most thorough, helpful and personalised response from him that not only answered my questions but asked me if I had any more.
Actually, I do know what I expected: A stock, wordy, delayed, confusing reply, because THAT was how every interaction I’d had with a financial institution had been up until that time and although I was pretty keen by that time to invest in something that was not a house I was struggling to find an alternative.
Since that first email Dean’s free sharing of knowledge has been a huge help to me in learning about all kinds of investing in New Zealand and over the years I’ve regularly emailed, phoned and had the occasional coffee with him in person because he always manages to talk in a language I can understand. He doesn’t use “smoke and mirrors” when he speaks and he just wants to educate people to become better investors.
It was Dean who first introduced me to SPIVA which showed me that active managers underperform passive managers MOST of the time and it helped me feel comfortable with my choice NOT to try to pick individual stocks and from that point on I started investing via the passive investment path.
Although my regret is the same as many - I WISH I had started investing earlier - I actually think I’m lucky to have started investing at the time I did because by then new platforms were coming along who just cut all the mumbo jumbo out of investing, they completely changed the language and made it understandable and I was ready to jump aboard because by that point I was deeply sceptical of these big active fund managers (having had investments with them in the past) and my gut instinct told me that they were not worth the fees they charged. And I was right. Index investing is still small in NZ compared with overseas, but we are certainly aware of it now as a way to invest and grow wealth in something other than housing. Thank goodness!
So, when I learned that in August 2019 he would be starting his own index funds on a digital investment platform, which he was calling Kernel, you bet I was interested and I’ve enjoyed following their development ever since. Creating your own index funds ain’t no walk in the park and about a year’s worth of work went into Kernel’s creation because as you might imagine, there are a lot of FMA legal processes to adhere to where every single component that is involved in running these funds and every person involved was heavily scrutinized.
So, what are Kernel offering?
Kernel is a fully licenced index fund manager. They created and currently run three diversified index funds and make them available through an online investment platform. Although they do have an Auckland based office, they are 100% online (which made them extremely agile when COVID-19 came along as they just picked up their laptops and went home) and they have created passively managed index funds with low management fees of just .39% and a monthly membership fee of $3. Plus, there is a fee rebate of .10% p.a. for investors with over $25,000 invested. The monthly fee only applies after your portfolio balance is over $1000, so if you are just testing out their systems while you decide if they are the platform for you, then you can do this at no cost. And once you do decide to get investing, there are no transaction fees when you buy and sell investments.
Being a portfolio investment entity (PIE) it’s tax-efficient so you pay tax based on your prescribed investor rate (PIR) of 0%, 10.5%, 17.5% or 28%.
You hear a lot of talk about fees and don’t get me wrong, low fees are super important, but it’s important that your investment is also tax efficient and that you choose the right fund. Their aim is to provide the index return even after fees have been deducted. They have created three funds to date that can be used by self-directed investors like me, by financial advisors whose clients want a passive investment approach, by charitable trusts or wholesale investors and investor migrants. They want people to employ a long term investment strategy where you invest and stay in the market, either investing a lump sum or by regularly contributing to your fund over a long period of time (dollar-cost averaging) and they have the auto-invest option to let you do this.
Part of being a steady investor is having a routine of regular investment and NOT trading, so because of this and in an effort to slow down the rash investor, they have a weekly investment cycle, meaning Kernel processes your order once a week on a Wednesday. Both buy and sell orders are processed at midday on Wednesday and units or cash will appear on your dashboard around midday on Thursday. They were very conscious that they wanted to target the long term investor and wanted to encourage ‘good behaviour’. During this current market correction it meant that people didn’t/couldn’t react and panic sell, which is all part of accepting the volatility of the market and just staying the course. Also, they can keep their running costs low by trading less frequently and their intent is to always drive costs of doing business out, leaving more for the investor at the end of the day.
Who is their ideal investor?
Is it someone who wants to invest $20 a week. Or is it someone who wants to drop $100,000 in there?
I didn’t know, I asked them. They said that their average balance is higher than other investment platforms and their users are more likely to start with a lump sum, somewhere between $3,000 - $4,000 and then continue to invest a few hundred dollars a week or fortnight. There is an even split between male and female (which I found particularly encouraging as I’m trying to motivate more women to invest) with an age range of 30-55 years and they each have an investment timeframe of ten years plus.
Keeping It Simple
Hands up if you feel overwhelmed by choice when you look at selecting an investment? I know I did. There are now a massive amount of investment options you can choose from and I know that new investors are often overwhelmed by this. Having a choice is great, but too much choice is TOO MUCH and when my investment strategy is “just keep it simple”, then a company like Kernel makes sense, they give you three options, all of which are good.
Kernel currently only offers three quality index funds, there will be more coming soon (just sign up to their newsletter where they will announce these new funds) but their plan is not to overwhelm us with choice, just provide a mix of funds that can make up a portfolio. But I can’t see it ever getting to the point of the likes of Investnow, Sharesies or Hatch where the choice is huge.
Why?
Because whereas those platforms transact other peoples' products, Kernel is a provider of the fund. It’s not selling other peoples product, it is selling its own, so you currently get a choice of three:
NZ 20 Fund
This fund is designed to track the S&P/NZX 20 index. Made up of the 20 largest companies listed on the NZX. It is designed to provide capital growth and income generation and would be the fund that makes up the bulk of a portfolio because of its exposure to blue chip companies:
Fisher + Paykel Healthcare, The a2 Milk Co, Spark, Meridian Energy, Ryman Healthcare, Auckland Intl Airport, Contact Energy, Chorus, Mainfreight, Fletcher Building, Infratil, Mercury NZ, EBOS Group, Goodman Property, Port of Tauranga, Sky City Entertainment, Precinct Properties, Kiwi Property Group, Z Energy, Air NZ, Cash & Cash Equivalents
Why a top 20 fund and not a top 50? This blog post from Kernel explains why and is worth reading: Should I invest in the NZ 50 Fund or NZ 20 Fund?
They believe the composition of this index gives a more consistent performance, it drops poorly performing companies sooner and picks up those with improving performance more quickly. In the last 10 years the S&P/NZX 20 Index has outperformed the S&P/NZX 50 Index by 1.9% p.a.
Kernel NZ 20 Fund returns and the S&P/NZX 20 returns
NZ Small & Mid Cap Opportunities Fund
This fund is designed to track the S&P/NZX Emerging Opportunities. It gives you the chance to invest in smaller and growing NZ companies which are outside of the Top 50. The number of companies within this fund changes, it started at 37, there are currently 40, it changes based on how big and well-performing the companies are. This fund is more volatile and designed to make up a smaller percentage of any portfolio:
Property for industry, Argosy Property, Pushpay Holdings, Vital Healthcare, Arvida Group, Metlifecare, Heartland Group Holdings, Scales Corporation, Stride Property, Synlait Milk, Sandford, Oceania Healthcare, Kathmandu Holdings, Investore Property, Restaurant Brands, Fonterra Shareholders Fund, Skellerup Holdings, NZX, Napier Port Holdings, Delegat Group, Tilt Renewables, Vista Group International, Tower, Hallensteirn Glasson, Serko, The Warehouse Group, New Zealand Refining Co, Briscoe Group, Tourism Holdings, EROAD Ltd, Comvita, New Zealand King Salmon, Seeka, PGG Wrightson, Sky Network Television, Turners Automotive, Gentrack Group, Steel + Tube, Abano Healthcare, Augusta Capital, Cash & Cash Equivalents
Kernel NZ Small & Mid Cap Opportunities Fund returns and the S&P/NZX Emerging Opportunities returns
NZ Commercial Property
This fund is designed to track the S&P/NZX Real Estate Select index. It invests in the eight largest Real Estate Investment Trusts (REIT’s). Collectively they own about 300 properties throughout NZ:
Goodman Property, Precinct Properties, Property for Industry, Kiwi Property Group, Argosy Property, Vital Healthcare, Stride Property, Investore, Cash & Cash Equivalents
Kernel NZ Commercial Property Fund returns and the S&P/NZX Real Estate Select returns
NOTE: You might look at these returns and think “Ruth, are you INSANE, why would I invest in funds with such terrible returns?” Just keep in mind that I’m writing this in mid-May 2020 during a global pandemic and our companies are all going through immense change as they try to adapt. I listed each company purely because by doing so I can identify with each of them and make the connection that as an investor I’m not just buying a unit in a fund each week, I’m instead, buying a tiny piece of each of these companies and they are working hard every single day to do business, which is freaking hard work at the moment! Many are announcing large job layoffs and make no mistake, things are particularly grim out there for New Zealand businesses and the New Zealand economy at the moment. But do I think that given time things will improve? Heck YES! I have immense faith in our country to work their way through this pandemic and over time I hope that each company will improve, grow, create jobs and return to profitability. Because an index fund is self cleansing, some of these companies may/will fail and never recover and they will fall off this index and be replaced by the next top performer. That’s an unfortunate reality but another reason why I’m happier to invest in an index fund, rather than in single companies. And also, keep in mind that out of adversity comes opportunity and there will be new companies who are in a huge growth phase right now and I want to be part of this.
On the Kernel website, they write a good blog too, with a lot of short and informative pieces designed to help you learn. They provide as much information as they can with their aim being to educate people and help people make an informed decision, at the right time, for the right goal and I think that is becoming more and more important as it just helps me understand what I’m investing in better because the golden rule is “don’t invest in something unless you understand it”. Many websites use that tag line, but then they don’t provide the answers you need, but I think this site does and even if you don’t invest with them, their blog is worth a read and I like this recent post regarding how active managers performed during COVID-19: How are active managers faring through Covid-19?
Prior to COVID-19 Kernel have also been up and down the country delivering Q&A sessions and if you search them on YouTube you can find a few of these. I’ve also heard them interviewed on NZ Everyday Investor: #68: Building wealth starts with a Kernel / Dean Anderson. You can catch another interview with them here: Kiwi Talkz #28
And a more generic search on YouTube of “Kernel Wealth” will pull up panel discussions they have been on too.
So I Signed Up
Because I felt I couldn’t write a whole blog about something I have not tried, I have gone ahead and signed up with Kernel and as you would expect, it is a five-minute process where I just needed to have my IRD number and a form of ID handy (NZ drivers licence or NZ passport). I chose to reinvest any future dividends instead of getting them paid out and using their prompts I immediately transferred $100 from my bank account into my Kernel account and as soon as I saw that show up on my dashboard (it took 24 hours to transfer money in) I was ready to invest.
Buying $100.00 NZD of the Kernel NZ 20 Fund
I chose the NZ 20 Fund because that is in line with my other investments (diversified index fund tracking the largest listed companies in NZ). I’m not going to do it today, but an ‘ideal’ investment would be to have both the NZ 20 and the NZ Small & Mid Cap Opportunities fund because by doing so I pretty much have the entire share market represented, with little overlap.
Returns are not looking too flash at the moment. Since inception returns are 3.03% and understandably for the last three months it’s down -6.59%.
But that’s what happens when I choose to start an investment in the middle of a global pandemic! I’m basing my decision on history and the knowledge that over the course of my lifetime, there might/will be some crashes, but the share market always goes up, therefore, anytime is a good time to get involved because my intention is to be a long term investor.
They do however show the historic returns of the index they are tracking, so while always having the phrase “past returns don’t predict future returns” on loop in my head, this does give me an idea of the funds potential:
5 year return of 14.61% for the S&P/NZX 20 index
There is no doubt that becoming an investor has never been more accessible to people and these easy to use platforms have welcomed an entirely new generation of investors that long-standing investing firms were NEVER going to attract because their platforms are too hard to use, too clunky, plus so many of them come with high fees, which as SPIVA shows certainly don’t guarantee better performance. So, finding a small, yet quickly growing firm like Kernel is a little like finding a needle in a haystack, but they are one worth searching for.
My investment plan is to always keep things simple:
I own my home
I invest in KiwiSaver
I have a fully-funded emergency fund
I have cash allocated for short term needs
Then I invest into just three low-cost funds for the very long term. Currently, I do use three SmartShares funds for this (NZ Top 50, US 500 and NZ Property), but had Kernel been around when I started, I could easily have used two of their funds instead (NZ 20 and NZ Commercial Property).
Due to my blog, I do sign up to a number of other investments so that I can blog about it (gold, Bitcoin, Hatch, Sharesies, Simplicity, SmartShares, individual companies etc), something I think is necessary, but at the same time, I always stick with my regular investments above.
For someone who is not a blogger, but just wants to be a long term investor and grow wealth it does you no good to chop and change all the time and spread your hard-earned dollars over too many platforms and too many funds, you just dilute the impact that each dollar invested can have, plus you pay too much in fees overall. HOWEVER, I do think I’m going to start a regular contribution into this NZ 20 fund, start tracking it in Sharesight and just see how it works and reassess it down the track.
So, there you have it, the wordiest review I’ve probably ever written! Why say something in 1000 words when you can use 3000!
Happy Saving!
Ruth
$10 SIGN UP BONUS
Kernel have a $10 sign up bonus for followers of The Happy Saver when you make your first deposit. If you would like to start using Kernel, consider signing up using THIS LINK to take you to the Kernel website where and you will see a pop-up window, enter your email address and Sign Up for free.
