Generate fund performance - February 2022
February was another tough month for global equities and this was reflected in the performance of the funds. The Focused Growth Fund declined -1.94%, the Focused Growth Trust -1.97%, the Growth Fund -1.03%, and the Conservative Fund -0.70% over the month. Despite the sell off in markets, 1-year returns remain positive with the funds returning 2.36%, 2.20%, 2.73%, and 0.78% respectively.
Global equity markets continued their volatility in February, with Russia’s invasion of Ukraine adding further tension to a market already concerned with higher inflation, tighter monetary policies, and slowing global growth.
The MSCI World benchmark fell -2.5% in local currencies during the month, bringing its performance since the start of the year to -7.6%. This performance in NZD terms is -5.2% for February and -6.4% year to date.
Our strongest performing investment in February was copper miner First Quantum (+18.7%), which benefitted from rising copper prices as inflation stayed high and market participants rushed to secure supply of a metal crucial for our transition to a more sustainable global economy. AstraZeneca (pharmaceuticals, +6.9%) and OZ Minerals (copper mining, +6.6%) also performed well in a falling market, while Berkshire Hathaway and Amazon (both +2.7%) made robust, positive contributions to returns given our funds’ significant investments in these companies.
On the other side of the ledger, Meta Platforms (Facebook) was our worst performing investment for the month. The stock, which had performed relatively well during December and January, fell -32.6% in February after releasing earnings guidance for 2022 that was well below the market’s expectations. Three issues amplified the market’s fears. First, Apple’s changes to its iOS operating system to increase app tracking transparency have hindered small advertisers’ ability to target potential customers, which reduces the effectiveness of Facebook & Instagram advertising and has led to advertisers spending less on Meta’s properties, at least temporarily. Second, Mark Zuckerberg and his team are transitioning Instagram to be more focused on short-form video in response to TikTok’s success, which will also slow earnings growth over the next few quarters. And third, Meta has pushed ahead with investing $10bn per year to develop the metaverse despite facing material headwinds to its core revenue growth.
We, and most market participants, would prefer Meta to better balance its ambitions to develop the metaverse with its duty to enhance shareholder returns from its core advertising business, and these concerns led to the market’s material re-pricing of Meta’s stock. We consider the stock to now be trading at depressed levels – and plan to hold onto most of our investment after trimming some of our holding both prior to and soon after the earnings announcement was released.
New Zealand & Australian equities
The NZ share market broke the global trend by generating positive returns in February. More specifically, the S&P/NZX 50 index gained +0.7%. The RBNZ dampened market enthusiasm by signalling that it sees the Official Cash Rate topping out above 3% in early 2024. However, a lack of negative surprises from the local reporting season buoyed the market, allowing the NZX50 to buck the global trend.
Meridian Energy was the strongest performing investment in the domestic equity allocation, appreciating by an impressive +14.6%. While this admittedly comes after a relatively weak month in January, there was welcome news in February that Rio Tinto, the majority Tiwai Point smelter owner, was interested in extending their electricity contract with Meridian beyond 2024. For the first time, Rio Tinto promoted the attractiveness of the “green” aluminium produced at this facility, which is backed by renewable hydro energy. As regular readers will know, the smelter consumes 13% of the electricity produced in NZ. Therefore, an exit by Rio Tinto would result in depressed wholesale electricity prices while the electricity market recalibrates. Finally, during their financial results presentation Meridian demonstrated progress in finding initiatives to replace the smelter's demand. Some of these initiatives included supporting clean hydrogen production, powering data centres and electrifying coal-powered dairy plants.
Infratil, the largest investment in the domestic share component of the portfolio, also enjoyed a strong February (+5.0%). Infratil hosted an investor day during the month where they presented the significant growth they expect to come from their US renewables business, “Long Road”. They announced a shift to owning future projects, rather than selling them, and set an ambitious target to reach a run rate of $500m EBITDA for 2026 - significantly above current market expectations. They are currently looking to sell a small part of this business, which we expect to be a positive catalyst for Infratil stock.
My Food Bag was, again, a casualty of the negative sentiment towards consumer stocks. The company released no news during the month, but was still the weakest performer in the domestic component of the funds (-12.3%). While we understand the concern that increasing interest rates will reduce consumers spending power, food is typically not thought of as discretionary, which reduces the impact on My Food Bag. As such, we are happy to own it through this difficult period given the valuation support.