As the world celebrated New Year’s Eve in 2019, no one could have foreseen one of the most turbulent years in modern history. The rollercoaster of 2020 has had an extraordinary impact not only on the economy and financial markets, but on all our personal lives - with a monumental transformation in everyday interaction across a wide range of contexts.
Covid-19 hit hard and fast like no other. Within weeks, the novel coronavirus had spread across almost every inch of the world. Travel became non-existent as cities went into lockdown. Entire industries were negatively affected and millions of jobs lost. The S&P 500 lost more than one third of its value in under a month, breaking the record for the fastest ever decline of that magnitude - and oil prices went negative for the first time in history.
The bear market didn’t last long however, thanks to governments around the world pumping trillions of dollars’ worth of stimulus into the global economy, and interest rates collapsing to record lows. Quantitative easing helped keep financial markets functional, with just about every tool of Central Bank arsenals being mobilised.
Despite all the doom and gloom, global stock markets finished the year at new record highs, as investors looked beyond Covid-19 to vaccine developments, the US election, Brexit and the likelihood of long-term growth.
While 2019 markets were heavily impacted by trade wars, the preeminence of big tech and a slowly imploding oil sector, 2020 opened with a completely new crisis from left field which dominated market dynamics for the year and is likely to keep doing so in 2021.
In the first part of 2020, Covid-19 put the brake on travel and leisure, accelerating trends like the dominance of Technology companies who could now provide much-needed work-from-home tools in addition to other in-demand product lines, and online retailers who saw a pickup in already strong demand for their channels. On the other hand, extreme weakness came from Energy companies with demand for oil plummeting, Financials coping with yet another round of record low interest rates, and bricks and mortar retail.
Healthcare, which at first appeared to be in a good position to weather the crisis, soon split between those positioned to supply protective gear and develop vaccines performed strongly versus those who had to put activities like elective surgery on hold.
The second part of the year offered isolated reprieve as new vaccine trials proved wildly successful and offered a light at the end of the tunnel. Energy remained the weakest sector, however the November Pfizer/BioNTech announcement saw the energy sector 12% higher in a day and triggered the biggest
one-day junk rally ever seen, offering a lifeline not only to vulnerable individuals but also down-and-out sectors around the globe.
Finally, 2020 saw very strong growth in sustainable investments with the pandemic providing a tailwind both for demand and performance in so-called ESG investments, those offering stronger outcomes in Environment, Social and Governance arenas.
Unsurprisingly, Covid-19 dominated fixed income markets in 2020. February and March saw central banks cut interest rates aggressively around the world, with long term interest rates falling to multi-generational lows as equity markets cratered and oil prices crashed. The global financial crisis handbook was well and truly cracked open with central banks buying back bonds, providing liquidity to banks, and facilitating loans to small businesses among many other supports.
And not a moment too soon. Even US government bonds, one of the most liquid bonds in the world proved hard to trade at the worst part of the risk sell-off in March, until the central bank cavalry came over the hill. Governments’ responses such as wage subsidies and outright stimulus cheques were no less extraordinary.
A combination of central bank and government interventions firmly reduced the risk of a depression and fuelled a massive asset-price rally from gold to stocks to commodities. An interest rate bounce during our winter was augmented by positive vaccine announcements in October and the outcome of the US election in November which cemented the likelihood of further stimulus. In the days post-election, few pundits believed both Georgia seats would go Democrat with the prospect of even more stimulus, but as the year ended, global rates began to creep up as that eventuality became more likely.
While New Zealand was thankfully able to chart its own course through the pandemic, we generally followed global patterns in interest rates in all but one dimension. After cutting the OCR (Official Cash Rate) from 1% to 0.25% in March, the Reserve Bank was adamant through November that negative OCR rates were on the table after February 2021. Despite the crisis hitting harder overseas, other central banks were clear that negative interest rates were decidedly off the table, citing research that it was potentially ineffective. The RBNZ’s stance changed abruptly post the positive vaccine news along with further evidence of economic strength and burgeoning house price inflation driven by lower mortgage rates.
Consequently, we ended the year with all cuts to negative interest rates priced out of the market. The interest rate on a 10-year NZ government bond started the year at 1.74% and fell to a low of 0.46% after the announcement of our own aggressive government bond buying program. It ended the year at 0.99%.
The Kiwi Wealth Growth Fund (Growth PIE) performed exceptionally well in 2020, returning 11.86% for the year after tax and fees , beating the benchmark by 3.49%. The main underlying strategy components of the fund include: Global Thematic, Global Quantitative, Core Global as well as alternative investments.
Global Thematic locked in yet another strong year returning 16.02% in gross NZD terms, beating the MSCI All Country benchmark by 6.56%. Many of the stay-at-home themes benefitted the portfolio through the Covid crisis and helped cushion downside through the height of the turmoil. Global Quantitative also returned a respectable 9.71% gross, beating its benchmark as well as comparable strategies in the market.
Core Global also enjoyed a year of outperformance with respect to it’s benchmark, and continues to target a tracking error of less than 1%. Lastly, the alternative investments performed well particularly during the selloffs early in the year which helped to mitigate tail risk. As equity markets bounced back, some of those gains were given back but overall the alternative assets finished the year up 8.69% gross.
2020 was another pleasing year for the Kiwi Wealth Fixed Interest Fund (Fixed Interest PIE) which returned 4.04% after taxes and fees , outperforming the benchmark by 0.52%.
We began to add longer maturity US Treasuries in January through March as news of the pandemic started to concern us. We emphasised investing in very high-quality longer maturity NZ bonds on the announcement of the LSAP in March but began to reduce both exposure to New Zealand (favouring harder hit Australia) and overall maturities as the year ended. This was in the wake of the Reserve Bank’s stepping back into line with global peers and the positive vaccine news. Exposure to corporate bonds hit us in March but they performed well over the year as credit spreads tightened into year end.
 Investors pay tax in the funds at their marginal rate but for the purposes of this calculation we assume the top rate applicable which is 28%. A fee of 1.5% for the Kiwi Wealth Growth Fund (Growth Fund) and 0.5% for the Kiwi Wealth Fixed Interest Fund (Fixed Interest Fund) is assumed. These are the same fees used in the respective benchmarks. We use the Growth Fund and Fixed Interest Fund as proxies for performance of client portfolios. This is because these funds are fully tax paid and reflect the most accurate performance of client portfolios
|Portfolio Performance Summary
Calendar year and after tax and fee returns since 2006
|For the following 5 year period 1 January 2016 to 31 December 2020 after tax and fees*|
*average annual compound return
We have used the returns from the Fixed Interest Fund and the Growth Fund as the basis for calculating a proxy for client portfolio returns in broad mandate groupings:
|2020 Performance Summary|
|Mandates||Kiwi Wealth portfolio return||Out-performance over benchmark||Weight in Growth Fund||Weight in Fixed Income Fund|