How is my “Kernel S&P Kensho Moonshots Innovation Fund” performing?
23 Jan, 2022
How is my “Kernel S&P Kensho Moonshots Innovation Fund” performing?
In a word. Poorly. It’s down 27% with no signs of stopping its slide.
But I can’t complain; the fund manager themselves forewarned me.
Kernel Wealth is a ‘new’ low-cost index fund manager, having started with three index funds in 2019, growing to 11 since, and I’ve enjoyed watching their development.
Now that I’ve invested in this specific fund with the ridiculously long name of “Kernel S&P Kensho Moonshots Innovation Fund” for almost a year, I thought it an interesting exercise to see if the returns are living up to my high expectations.
Hmmm, let’s just say, it’s not quite what I was hoping for:
Screen showing the downward slide of the fund.
Never has the disclaimer “past returns don’t predict future returns” held more truth. Given we are nearly one year in, can I keep the faith? It’s a struggle, but I’m trying to.
Kernel launched this fund on 17 Feb 2021, and I invested $100, paying $1 per unit. Since then, I’ve invested just $20 a week, and the price per unit has steadily tracked downwards to almost .50c per unit. I’ve been ‘mostly’ consistent, missing the occasional deadline if I’ve not had sufficient funds in my Kernel account, mainly due to them taking out their $3 monthly fee. This sometimes leaves me annoyingly short, requiring me to top up my account so the trade can be processed.
How did we choose this fund?
It was Jonny who wanted to invest in this specific fund. I was more than happy with our status quo of just buying ‘the whole market’ using a couple of Smartshares ETFs. It is not my preference to niche down into individual concentrated market sectors as this fund does. I’m not looking for any kind of excitement when I invest, I just want to get it done and go and find excitement somewhere else in my life.
Jonny was interested in this particular fund because he likes technology and innovation. Because that is how the world is going, being part of a fund that drills down into companies specific to that theme might mean it does OK? Because he had been telling me YEARS before Bitcoin rose to fame that it was worth investing in, I thought I’d better listen to him this time.
The fund has 50 Information Technology companies within it, and the overview sounded ka pai (good) to him:
“Be like a venture capitalist and diversify your portfolio by investing in disruptive ideas and innovations that will shape our lives today and in the future. This fund is comprised of 50 US-listed companies headquartered globally, with the highest Early-Stage Composite Innovation Score as assessed by the AI smarts of Kensho. The fund provides exposure to 21 disruptive sectors such as smart grids, cleantech, cyber security and space exploration; these are the Moonshots. Market capitalisation and liquidity are key criteria for index selection; with the minimum company size being $100M. These international high-growth companies are a mix of groundbreaking start-ups and established innovative corporates each with the possibility for exponential potential. This fund tracks the S&P Kensho Moonshots Index.” Kernel Wealth
Say what? Before I move on
What on earth does Moonshot mean?
In a finance context, it means an “ambitious, exploratory and ground-breaking project undertaken without any expectation of near-term profitability or benefit. And also, perhaps, without a full investigation of potential risks and benefits”. www.WhatIs.com
Who on earth is Kensho?
Basically, they are a company that use A.I. (artificial intelligence) to analyse massive amounts of complex company data, which can then be used to decide the make-up of a fund.
This is what high risk investing looks like
If this has not already made you realise that this is a high-risk investment, read on.
We decided to begin to buy this fund, investing in it as a ‘satellite fund’, meaning it makes up a tiny part of our overall wealth, less than 2%. I’m glad I took that view and didn’t go all-in. I do not like to compare investing to gambling, but this is a gamble, in all honesty. On their Risk scale of 1-7, Kernel gives it a 7, “high risk”.
This fund is designed to be passively managed and track the S&P Kensho Moonshots Index. If you check out this index, it’s been extremely jumpy, particularly in the last two years. Put simply; an index measures the performance of a market, in this case, the reach for the stars, let’s see if this works “Moonshot” part of it.
What specific sectors am I invested in?
Via the Kernel website, you can see what industries are within the fund. There is a vast and exciting range: Genetic Engineering, Cyber Security, Smart Transportation, Human Evolution, Smart Buildings, Smart Grids, Enterprise Collaboration, Distributed Ledger, Digital Communities, Cleantech, Semiconductors, Autonomous Vehicles, Enterprise Collaboration, Future Payments, Internet Services + Infrastructure, Wearables, Space, 3D Printing, Drones, Democratized Banking, Virtual Reality, Robotics
I’m not going to lie. While I understand the broad industries, I don’t recognise 98% of the companies listed in this fund! And that’s OK.
Thematic Funds and Satellite Funds
Kernel refers to this fund as a Thematic Fund. I was forewarned about how these might fit within my investment portfolio. Articles they wrote around the launch explain how thematic funds would NOT be a core part of a portfolio. Instead, it would be “a ‘satellite’ investment typically making up to 10% of your invested money”.
Whereas my two regular ETFs (Smartshares USF and FNZ are where the bulk of our invested money goes) are steady, and gently grow over time with a few jumps and dips thrown in, a satellite fund or a sector-specific fund such as this is hugely volatile. Still, it also has the potential that it ‘might’ outperform my other two funds, thereby giving me the edge.
“Hope” is a poor investment strategy, but a great imagination can be helpful! Imagine if one of these companies in this S&P Kensho Moonshots Innovation fund finally developed that thing I really want to be invented, teleporting, and I own a piece of it, and the price per unit soars? It’s a risky investment strategy, which is why you only ever want to expose a small amount of your overall portfolio to it.
By investing in this Kernel fund, I’ve niched down, become more of a speculative investor and decided to pick a sector and just buy a particular corner of the investment market.
What would JL Collins say?
JL Collins of the book The Simple Path to Wealth (if you only read one book on investing, let it be this one) tells me that this is PRECISELY THE WRONG THING TO DO. But we humans are curious, and Jonny was interested in investing in a fund that only buys into the latest tech advancements. Therefore, we (all financial decisions are joint decisions) decided to make a small weekly $20 investment into this fund and see how it plays out.
Because we are still following an index, the fund will move in the direction of that index. If companies within the fund strike on some new technology, such as teleporting, and the world goes mad for it, the fund will rise in value. But if they don’t, well, it may fall.
“Be like a venture capitalist”, they said.
Since inception, our investment is down -27.30%.
It turns out I suck at being a venture capitalist.
Our fund returns here shown using Sharesight:
Sharesight screen showing the performance of the fund compared to the NZ Top 50.
Look beyond the percentages you read.
There was something that I didn’t understand when I was comparing “Index Returns” and “Fund Returns” on the Kernel website, so I asked Kernel to clarify it for me based on the figures that were on their site at the time (10/1/22):
Screen showing the difference between Index Returns for 1 year and Fund Returns for almost 1 year.
How can the index returns for one year vary so wildly from the fund returns of almost one year?
Their response:
“The reason behind the difference in returns from the index vs the fund is due to Moonshots having a good month in January 2021, which is pulling up the index returns for that year. We launched the fund in February, and the fund has since been downwards. Because January won’t be included in the fund returns, they will be a lot less than the index returns”. Nisal @ Kernal
That makes sense to me, but I couldn’t help but feel that this should be a salutary lesson for investors. It would have been easy to read the actual index returns and think, “this is awesome” I’m all in, without also reading how the Kernel fund itself has, in reality, performed. If you are veering off into satellite investments like this, you have to, more than ever, do your research, keep a close eye on things and remember that past returns don’t predict future returns.
You have to know and understand what you are getting yourself into here. The value of our investment is dropping each week at the moment. And while I’m not overjoyed at that fact, I at least understand what’s going on, and because I’m investing with a long term view well beyond the 11-month mark of this fund, I’m OK with this investment. Therefore, I encourage you to go in with your eyes wide open.
Take this blog post as a cautionary tale, particularly if you are new to investing.
Investing in the share market is a fantastic way to grow your wealth over time, but only if you take the advice that JL Collins, and also Kernel offers themselves and that I’m certainly an advocate of, that you invest into a few key funds that buy an entire market and perhaps just leave it at that. I was quite happy to leave it at that.
However, if you, like Jonny, decide to ‘have a flutter’ somewhere else, do it with a minimal amount of money. The payoff ‘could’ be high, but equally so could the loss. We’re currently staring at a 27% loss, which is significant.
I only lose if I sell.
BUT, I keep in mind that I only lose money if I sell these investments and lock in my losses. As it stands today, I own a certain amount of units that are going down in value, and with each price drop, my $20 buys more units, more cheaply, in that fund. As mentioned, when it first launched in Feb 2021, the price was $1 per unit. When I wrote this in mid-Jan 2022, the price was .53c per unit. If and hopefully when the price rises, I’ll enjoy some gains. All of those same units will now be worth more.
We own four small satellite funds.
I’ve consistently invested in just two ETF funds that buy both the US and NZ markets for the last six years and both have consistently performed well year on year. I’ve largely resisted the curiosity I’ve felt to niche down and pick individual companies or funds offered by Kernel, Sharesies, Hatch, Investnow, Smartshares and many others.
Of the hundreds of funds that they collectively offer, we have very small investments in these four satellite funds and this is how they are doing:
Current value and return 13.01.22*
Kernel S&P Kensho Moonshots Innovation $712 (-27.30%)
Kernel NZ 20 $3,544 (1.43%)
Sharesies Smartshares NZ Property ETF $5,632 (4.38%)
Hatch Gender Diversity Index ETF $108 (17.05%)
*After fees and taxes. Previous 12 months. I have worked out my percentage returns using Sharesight.
My 14-year-old daughter has invested varying weekly amounts for 3.5 years in the Sharesies Smartshares US 500 Fund (USF). Current value $3,489, return 31%.
It seems that a 14-year-old might be more successful than a venture capitalist?
Collectively these four funds represent just 2% of our entire portfolio, so while I’m annoyed at the Innovation fund for going down in value, thems the breaks I’m afraid, that's the risk that I knowingly took and continue to take.
In one of their blogs, Stephen Upton, Kernel COO, writes:
“It’s important to note that any allocation to equities should have at least a 3 year time horizon. This needs to be even longer for the thematic funds, which should be at least 7 years. This is so short term fluctuations, corrections or world events don’t create a distortion in your wealth accumulation or prevent the achievement of your goals”.
In for a penny, in for a pound.
I figure that I’ve come this far. I might as well play on and see if, over time, those former high returns do appear. I’m not going to lie, it’s pretty tempting to put that weekly $20 in the primary investments that have consistently returned me 10% + each year, but I’m keen to stick around and see how this plays out.
But I’m itching to quit out of it. If I didn’t write a blog, I’d probably quit it now. Mainly because I’ve already worked out that I don’t need to take side punts like this to grow wealth, and the amount of money I’ve invested is so small that it’s unlikely to move the needle anyway, even if it does strike it rich. Any company already within the NZ 50 or US 500 could also come up with some spectacular invention that drives up the price of that fund.
I often hear new investors say they are looking for excitement in their investing. I’m exactly the opposite. Slow and steady wins the race, and by continuing with my boring yet extremely effective overall investment strategy, we will end up financially secure.
But, I’m doing this for you. I find this experiment to be quite educational and by trying these satellite investments, my FOMO is decreasing. I like being able to share the reality of my investments with you, so that you can get a real-life impression of how an actual investment performs, instead of just going off what an investment provider chooses to publish on their platform about their historical returns which hint at future potential returns. But keep in mind that your reality will be different again.
And in case you were wondering, no, I was not paid by Kernel Wealth (nor were they aware) that I wrote this blog post.
