Investment Insight | NZ Funds reports exceptional investment performance and discusses its approach
In the 12 months up to 31 March 2021, our KiwiSaver Growth Strategy achieved 107% returns. Over the last three years it returned 25.42% per annum after fees but before tax; and over the last five years 18.85% per annum, making it the top performing KiwiSaver fund in New Zealand for much of that time.
To celebrate our 12-month performance and let the public know about it, we booked advertising billboards in Auckland and Wellington. Late last week, the FMA contacted KiwiSaver providers to let them know they were concerned that the advertising of 12-month returns to the end of 31 March 2021 could create a potentially misleading picture in customers’ minds about KiwiSaver performance. This is because we’re now more than a year on from the bottom of the COVID-19 sell-off in March 2020. The sell-off saw dips of 30% or more in market indices around the world, and this was followed by a period of exceptional growth.
The reporting and advertising of annual returns has been an industry-wide practice since the very beginnings of KiwiSaver. Every KiwiSaver provider has these results on their website. It’s how independent organisations like Morningstar and Sorted rank and display KiwiSaver performance. But we respect the FMA’s new guidance, and in order to comply with it, we prepared replacement billboards, to go up before the Tuesday night deadline.
To illustrate their point, the FMA generated a table showing the differences between returns when the 12-month period takes the March 2020 sell-off into account. We have added NZ Funds’ performance to this table (see Figure. 1).
To celebrate our 12-month performance and let the public know about it, we booked advertising billboards in Auckland and Wellington. Late last week, the FMA contacted KiwiSaver providers to let them know they were concerned that the advertising of 12-month returns to the end of 31 March 2021 could create a potentially misleading picture in customers’ minds about KiwiSaver performance. This is because we’re now more than a year on from the bottom of the COVID-19 sell-off in March 2020. The sell-off saw dips of 30% or more in market indices around the world, and this was followed by a period of exceptional growth.
The reporting and advertising of annual returns has been an industry-wide practice since the very beginnings of KiwiSaver. Every KiwiSaver provider has these results on their website. It’s how independent organisations like Morningstar and Sorted rank and display KiwiSaver performance. But we respect the FMA’s new guidance, and in order to comply with it, we prepared replacement billboards, to go up before the Tuesday night deadline.
To illustrate their point, the FMA generated a table showing the differences between returns when the 12-month period takes the March 2020 sell-off into account. We have added NZ Funds’ performance to this table (see Figure. 1).
We also agree with the FMA that investment is a long-term game. Our focus is on transforming New Zealanders’ wealth, and we believe the task is an urgent one. The average New Zealand KiwiSaver balance is NZ$24,000 (the average for our clients is NZ$48,000). Australians, by contrast, have an average of A$130,000 each. KiwiSaver is now worth NZ$80 billion. Australian Super is worth A$3 trillion. Strong returns are essential to closing this gap and giving Kiwis the retirement they deserve.
The world is changing, and to achieve that transformation for New Zealanders, we’ve taken the view that our investment strategies should change too. Our performance over the past year was the direct result of the new investment approaches we’ve developed for the new market realities.
Our new investment approach for the new market realities
Most KiwiSaver providers are limited in the kinds of assets they can invest in – usually shares, bonds and cash. Our new investment approach means we’re not limited by asset class. As a result, we can seek out growth opportunities, wherever they may be in the financial markets.
This means we can invest in currencies, commodities, cryptocurrencies, futures contracts and options, alongside the traditional building blocks of our portfolios – shares and bonds.
We can also invest short as well as long across a wide range of asset classes. Investing long means we expect the value of an asset to go up. Going short is the opposite – it means we can take a position on the expectation that the value of an asset will go down, and profit from that fall for our clients.
Putting this approach into practice, here are five of the major investment themes in our KiwiSaver Growth Strategy that helped us deliver such outstanding returns.
1. Universa Black Swan Protocol
Universa is a downside mitigation manager who works exclusively with NZ Funds in New Zealand. The market options they purchase effectively act like an insurance policy to absorb violent market sell-offs. Having the Universa Black Swan Protocol in place – and being the only investment manager in New Zealand with it – meant that during the COVID-19 sell-off in March 2020, our Growth Strategy fell by only 17%, as opposed to over 30% for most major market indices.
This meant we preserved more capital for our clients, which in turn meant we could bounce back from the dip quickly.
2. Gold
Gold is a safe haven during times of market panic. As the COVID-19 sell-off began, it was clear investors would leap from share markets to gold, therefore pushing its price higher. Because we were able to buy gold futures contracts, we could move quickly. We took a large position on gold in February and March. We were then able to generate significant profit for clients, as gold’s value increased 25% between March and August 2020, from US$1,600 to US$2,000, at which point we exited our position.
3. Buying shares at good value
Because the Universa Black Swan Protocol had helped us preserve more of our clients’ capital, we were in a stronger position than most providers to capitalise on the rebound. The initial COVID-19 panic was a great opportunity to buy shares at great value, ready for a market rally. We were able to do this very quickly by buying futures contracts in global shares, rather than the shares themselves. We were also very specific about the types of contracts we were buying. The rebound began with the technology sector. We then moved into developing markets such as China, and then into US small cap shares when the US began to focus on its domestic economic recovery.
If we’d tried to take similar positions in the New Zealand share market, it would have taken far longer and we would likely have had a big impact on the market prices of the shares we were trying to buy. It also would have been much harder for us to exit our positions. So futures contracts in global markets enabled us to be much more nimble and responsive to the rapid market shifts that unfolded in the second half of 2020.
4. Bitcoin
We firmly believe that, in the current investment environment, if you’re prepared to invest in gold, you should be prepared to invest in Bitcoin. It acts as a store of value in exactly the same way because the supply is limited. It’s also now a far more liquid asset than it was in the past because it can be traded on institutional platforms. We began to invest in August and September 2020. That was the start of a major rally. We began buying at US$10,000 a coin. It’s now worth between US$50,000 and US$60,000.
5. Inflation
The US has recently pumped US$5.1 trillion of stimulus into its economy – around 20% of GDP. The vaccine recovery is also well underway – which in itself is a remarkable human achievement in a year. But these two things mean that we believe we have a strong view that inflation is headed back up from its current rock-bottom levels, back towards the 2% levels central banks around the world tend to target.
When inflation goes up, the value of bonds goes down. Because we’re able to take short positions as well as long ones, we were able to use this movement to our clients’ advantage. We took short positions on US 10-year Treasuries. As their yield went up and their value went down, we were able to make profits for our clients.
We remain incredibly proud of our 1-year result. And we’re pleased our campaign has initiated an important debate. We want New Zealanders to know that not all KiwiSaver providers are the same, and that NZ Funds is focused on transforming wealth for all New Zealanders.
Source: NZ Funds calculations.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
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James Grigor is Chief Investment Officer for New Zealand Funds Management Limited (NZ Funds) and a member of the NZ Funds KiwiSaver Scheme. James' comments are of a general nature, and he is not responsible for any loss that any reader may suffer from following it.
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