Generate Fund Performance - November 2022
World equity markets had another strong month in November, rising 7.0% in local currencies, in response to economic data that suggested the Federal Reserve may be close to winning the war against inflation. Our global stock investments performed very well this past month, benefitting from both the supportive market conditions and stock specific events.
Our investment in Horizon Pharmaceuticals gained 60.9% in November, mainly due to the company disclosing that it had held preliminary discussions with three large pharmaceutical companies about a potential takeover. Taiwan Semiconductor also had a strong month, rising 34.8% after Warren Buffett’s Berkshire Hathaway disclosed it had made a $4.1bn investment in the company during Q3. Our third strongest performer in the month was Meta, which gained 26.8% after it was reported that Mark Zuckerberg is moderating his metaverse ambitions and demanding better cost control across the wider business.
Our weakest performer in the month was in Roche Pharmaceuticals, which fell 7.4% after the results of a clinical trial showed that their potential Alzheimer’s treatment was less effective at clearing a toxic protein from the brain than the company had hoped.
We remain cautious on global markets as we head into 2023, yet confident in the quality and defensiveness of the companies in our portfolio to navigate what we expect will be a challenging economic environment.
New Zealand & Australian equities
The NZ share market had a solid month, appreciating 1.9% in November when measured by the S&P/NZX 50 Index. However, this headline return hides a significant dispersion in returns.
Fisher & Paykel Healthcare was up a staggering 21% in November. This is a company we have discussed in a number of past newsletters. It was a major beneficiary of the Covid pandemic because its products were used in hospitals to treat Covid patients. But as hospitalisations from Covid started to wane, it became apparent that hospitals had built up significant inventories of the company's products. As a result, it was expected that the company would face severe near-term headwinds as these inventories were used up. The market's reaction to this news was all too predictable. We took advantage of the weakness in the company's share price and added the company's shares to the funds on the basis that on a 3-5 year view this uncertainty would be resolved, and the market would shift back to focusing on the long-term growth opportunity of the company. In November, Fisher & Paykel made encouraging comments about customers working through their excess inventories, which was enough to see the share price bounce strongly.
The worst performing stock in the index was Ryman Healthcare, which plunged 21% in November. Ryman released a weak set of first half financials during the month. The markets have increasingly focused on Ryman’s balance sheet, particularly the high level of debt. A slowing housing market, which makes it more difficult for incoming residents to sell their home and shift into a retirement village, subdued cash collections. This factor, combined with a significant development spend, caused net debt to increase by $500 million over the last six months to $3 billion. The Generate funds didn't own Ryman shares before this result, but after the company's share price plunged down through its asset backing level, we took the opportunity to buy a small position.