If you haven’t heard, Kernel has introduced two new funds. Both these new funds are thematic funds. Thematic funds are the opposite of diversified funds like Vanguard International Shares Select Exclusions Index Fund or AMP’s All Country Global Shares Index Fund. Both of which have thousands of companies in them both diversified in terms of country and industry.
Thematic funds have a theme and are more focused on one industry. The theme is usually something that is predicted to be the next big thing. That could be in health care, electric cars, innovative technological, and climate change. So you’re not putting all your eggs in one basket, you’re putting your eggs in a themed basket.
A thematic fund generally has a lower number of different shares within them. The idea is to select a much smaller number of shares to try and capitalize on a future growth trend. Selecting a few companies involved in the Internet of Things, blockchain and cryptocurrency, or renewable energy, for example, could yield huge returns if those industries develop as expected.
There’s been a lot of talk about thematic investing lately, especially regarding switching KiwiSaver into Nikkos ARK Disruptive Innovation fund. And I get why people would want to look into it. ARK became famous primarily for a large Tesla investment made before Tesla’s share price skyrocketed. The ARK Disruptive innovation fund had a 132% return last year- which is insane.
This concerns me a little bit. I don’t think that you should have a concentrated risky portfolio fund, many holdings of which have bubble-like characteristics, as your primary retirement savings. It remains to be seen whether they can find another Tesla to maintain the spectacular return.
It’s not to say that I don’t like Thematic funds. In fact, I plan on investing in the new Kernel thematic funds. But, I don’t believe you should go all-in on them, especially not with your KiwiSaver. I might cap my investment in thematic funds to around 10 to 15% of my total portfolio. And with that, I wanted to do some more reading on thematic funds in general, what makes them great, and what makes them not so great. And then look a bit more into Kernels new funds- this is more of an investigation for me, rather than a review.
Just quickly- I’ll run through some advantages and some disadvantageous of thematic funds.
Advantages of Thematic Funds
- Thematic funds provide you with the opportunity to outperform specific market indices.
- Thematic funds provide concentrated exposure to specific themes and ideas, rather than broad diversification. If you really want to back a specific theme or idea, such as supporting electric vehicles or solving climate change, thematic funds give you a way to invest in a group of companies working towards these goals.
- Thematic investing focuses on trends and disruptive changes globally, so they can make great satellite investments to help hedge your investment portfolio.
- Thematic investing strategies are highly customization and can vary significantly based on your preferences.
Disadvantages of Thematic Funds
- Thematic funds generally have a higher risk profile than index funds. If the trend that the fund is trying to capture turns out to be a dud, then the returns as likely to be significantly lower than average. Or if the fund invests in a start-up that turns out to be a fraud, such was the case with Theranos- a company that once was worth 10 billion, or if you were investing in a fund which was relying on outcomes that didn’t go as planned such as the failed attempt at the legalization of recreational cannabis in New Zealand.
- Thematic funds generally have higher fees than passive index funds. Higher fees are generally accepted with thematic funds as more analysis is needed to identify businesses that are suitable to include in the fund.
- Thematic funds can have aspects of performance chasing. And we all know that past returns are not predictive of future returns.
Kernel’s New Thematic Funds
As mentioned earlier, Kernel has gone live with two new funds that I plan on investing in. The first thing I did was to read a bit more about these funds. The two funds are Kernels’ S&P Kensho Electric Vehicle Innovation and Kernel’s S&P Kensho Moonshots Innovation. Both funds have S&P and Kensho in the name, so what are they?
S&P is quite well known and stands for Standard & Poor. They are one of the largest index providers. Well known for the S&P 500 Index. S&P was founded in 1860, and have offices in 26 countries around the world. S&P also provide credit ratings for companies using the AAA to D scale. S&P has New Zealand rated at AA with a positive outlook.
Now Kensho is not as commonly known as S&P. I had to google that one. Kensho seems to me to be a data science company that uses machine learning and artificial intelligence. They seem to have access to all S&P’s data to help develop funds and provide financial reports. Honestly, their website is full of marketing speak, take this quote as an example;
Kensho tackles this problem with our unparalleled data pipeline ecosystem that ingests and processes all types of unstructured data for use in downstream workflows and applications.
So to me, Kensho are like S&P, but with calculators and models based on AI and Machine learning. On to Kernels new funds.
Kernel S&P Kensho Electric Vehicle Innovation
Kernel S&P Kensho Electric Vehicle Innovation is all about electric vehicles and the surrounding infrastructure. The fund invests in 11 vehicle manufacturers and 18 companies providing EV parts and infrastructure. So it’s more diversified than just owning Tesla- but Tesla is included in the fund. Other companies are involved in sectors like carmakers, car retailers, car parts, and electrical component makers.
- Blink Charging– who run electric car charging stations
- Plug Power– who are developing hydrogen fuel cells
- Ballard Power Systems– who are developing hydrogen fuel cells
- Workhorse Group– who make electric delivery vehicles
- NIO– who make electric vehicles
- American Axle & Mfg– who make electric car parts
- Dana Incorporated– who make drivetrain and e-propulsion systems
- Gentherm– who make innovative thermal management technologies
- Borgwarner– who make electric moters
- Allison Transmission– who make gearboxes for cars
- Lear– who make and develop car components and safety systems
- ArcelorMittal– who make “smart steel” for the future
- Kandi Technologies– who make electric vehicles
- Hyster-Yale Materials Handling– who make machinery
- SolarEdge Technologies– who make power optimizer, solar inverter and monitoring systems for solar panels
- Sanmina– who manufacture electronics
- Modine Manufacturing– who make innovative thermal management technologies
- Sensata Technologies– who make sensors, switches and systems to control power
- Stellantis-who are an automotive company
- Texas Instruments– who make semiconductors
- Meritor– who make parts for vehicles
- Luxfer– who make high-pressure aluminium and composite gas cylinder
I was surprised to see Cummins in this list- I have traditionally associated them with big diesel engines- but apparently, they are working on fuel cells, clean energy, and data centres- which was news to me.
The Electric vehicle innovation fund has certainly benefited from Tesla shares in the same way that the ARK disruptive innovation fund has, but there are other companies that have done extremely well in the last year as well. Blink Charging (BLNK) was up 1649%, Plug Power (PLUG) was up 1202%, Workhorse Group (WKSH) was up 997%, while Tesla was up 375%. These increases seem insane to me as an index investor.
Kernel S&P Kensho Moonshots Innovation
Kernel S&P Kensho Moonshots Innovation has shares in 50 US-listed companies chosen for their disruptive ideas and innovations. The companies need to have a market size of at least $100 million and must devote some of the company resources to innovation. The fund also sets out a maximum of 10 companies in each sector. There are 17 different disruptive sectors, such as Artificial Intelligence, 3D Printing, Virtual Reality, Genetic Engineering, Robotics, Drones, Smart Grids, Clean Technology, Cyber Security, Space Exploration, Advanced Transport systems, and Autonomous Vehicles
Even though the Kernel S&P Kensho Moonshots Innovation is a thematic fund, they invest in many different future technologies. I think I will have a larger weighing in this fund than the Kernel S&P Kensho Electric Vehicle Innovation fund. The 50 companies included are in the table below with links to their website. I’m not going to list what each does- as that would make this post too long. And it’s fair to say that I haven’t heard of many of them before- with the exception of Yelp, Lyft, and Slack.
Although both of these funds sound great, it pays to remember that both these Kernel funds have a risk rating of 7- which is the highest risk rating. They have had some spectacular returns over recent years- but as the adage goes- past returns do not predict future returns.
|Kernel S&P Kensho Electric Vehicle Innovation
|Kernel S&P Kensho Moonshots Innovation
These Kernel funds are also more expensive at 0.55% management fee compared to their other funds at 0.39%. There is a fee rebate of 0.1% for all Kernel funds once you have invested over $25k. But these are pretty good rates for thematic funds. Compared to Nikko’s ARK disruptive innovation fund, which has an estimated fee of 1.33%, Smartshares Automation & Robotics fund and SmartShares Healthcare Innovation fund, both with a fee of 0.75%, Kernel’s fund looks cheap.
I have to say- researching a thematic fund is more fun than researching a larger index with 500 to a few thousand companies. Generally with these large indexes there is not time to go and visit each of the companies websites to learn a bit more about them. You tend to just look at the top 10 companies. But with thematic funds, it doesn’t actually take that much time. And since I am planning on investing in these funds- I like to know a little bit more about each of the companies. So If you are thinking of investing in Kenels new funds then I hope that all the links to each of the companies above are helpful for you.
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