2020 investment review

Good returns outstripped by coronavirus volatility

Investment review provided by Mercer

The past year was characterised by volatility, as what was looking like a strong year for returns turned sharply negative on the arrival of the coronavirus. The majority of asset classes ended the year in the red, including most KiwiSaver funds. Unlike in previous years, our three main investment options did not perform as well as some KiwiSaver funds. There are two main reasons for this.

New Zealand shares 

We continue to maintain a lower proportion of assets invested in New Zealand shares than other funds. Instead, our assets are well diversified all over the world. This means the funds are not overly reliant on any one asset class, fund manager or company. This year, despite still suffering from the market sell-off in the first quarter of 2020, New Zealand shares were more resilient than many of their global counterparts. A large part of this was due to a ‘cushion’ from the two largest companies in the New Zealand share market, A2 Milk and Fisher & Paykel Healthcare, which both delivered very positive returns throughout the crisis and offset a large degree of losses in other sections of the market. However, this does show the highly concentrated nature of the New Zealand market and how a large degree of performance can be due to a small number of companies. While this can be a good thing when these companies perform well, it does serve as a large risk as there are little diversification benefits.

Commodities

To help diversify our portfolios, we have an allocation to commodities, which include oil, grains and precious metals. Over the year, this was a detractor, as commodities struggled to perform. Oil was a notable weakness. Oil price war escalation in February and March between Saudi Arabia and Russia provided yet another headwind to an already fragile global economy, particularly for OPEC+ emerging market nations. The price of oil dropped over 50%, ending in March at just above US$20 a barrel. Industrial metals also suffered as the pandemic-induced lockdowns caused rapid drops in production and, in turn, demand for these products.

Other main asset classes

While our assets are diversified across a range of asset classes, investments in international shares and bonds are the mainstay of our portfolio. Here is a brief overview of how these asset classes performed.

Global shares

Despite a very strong 2019, developed global equities suffered over the first quarter of 2020. Nations gradually shifted into lockdown to prevent the spread of the coronavirus pandemic, ultimately ending the year with a negative return primarily due to a severe sell-off in March. Developed global equities experienced immense intra-day volatility throughout March as the coronavirus epidemic escalated in Europe and the United States. Some of these drops were partially offset by government spending (like wage subsidy schemes) and accommodative monetary policy from central banks.

Bonds

Bond markets delivered positive returns over the year, benefiting as rates fell. Overall, bonds did their job of providing diversification benefits to the portfolios by offsetting some of the losses from equities. In New Zealand, the Official Cash Rate (OCR) experienced multiple cuts over the year, with an initial reduction in May 2019 from 1.75% to 1.5%, followed by a cut in August to 1.0%, with a final cut in March 2020 to 0.25%. This represents a record low and is expected to remain low for some time as the Reserve Bank of New Zealand hopes to stimulate the economy in light of the recent lockdown.

In light of a remarkable period of volatility, we believe our diversified portfolios remain well placed to navigate the uncertain future while offering opportunities to capitalise on market opportunities when they arise.